Colleagues,
Over the past little while, we’ve seen an accelerating array of imploding “green”
enterprises. The most spectacular has been the failure of Solyndra, a US
solar manufacturer which only last year was touted by President Obama as a
model of “green jobs” creation, and which was the recent recipient of a loan of
more than $530M from the US taxpayer (and there have been hints of
cronyism on the part of the White House (Note A)). That money
is now gone, and the FBI is investigating the company for fraud. This
comes on the heels of reports last year from Spain and Britain on the miserable
performance of “green jobs” creation schemes; a Spanish academic report from
more than a year ago concluded that each “green job” created in the solar and
wind power industries destroyed more than two other jobs, and cost in excess of
Euros 500k. That’s a lot of gelt to prop up one Spanish wind
farmer. Speaking of wind costs, this past weekend it was revealed
that a foreign-owned wind farm operator in Britain was paid over a million
pounds to shut down and NOT generate electricity for eight hours -
more than ten times the going rate they would have received if they HAD been
generating power (Note B). The shut-down costs will be added to
the electricity bills of British ratepayers, natch. We also learned this
weekend that Ontario’s costly Feed-In-Tariffs programme
has contributed only 86 MW to the province’s installed capacity of
nearly 35,000 MW (Note C), despite committing some $8B
in taxpayer dollars to reimburse “green” generators at rates up to ten
times what conventional and nuclear power plants are permitted
to charge (Note D). For reference, the Bruce nuclear generating
station in Alberta cost $6.2B to build, and is designed to generate
2200 MW, day in and day out, for the next 50 years or so.
Something significant has been going on here. Barbara Tuchman
defines “folly” as “the pursuit of policy manifestly contrary to self-interest.”
There’s more to these trends than simply political opportunism or ideological
bloody-mindedness; this sort of behaviour is indicative of a larger
problem, something depressingly recurrent in the human psyche that seems to
make us particularly vulnerable to effusions of nonsense from the allegedly
knowledgeable so long as there is the prospect of profit.
Back in early 2009,
when I was trying to get a handle on this subject, I took a look
at how and why humans fall victim to economic bubbles,
and I thought I might revisit my scribblings here (unedited), if for
no other reason than to see how well the analysis and predictions
hold up two years later.
In tracing the
career of the erring philosophers, or the wilful cheats, who have encouraged or
preyed upon the credulity of mankind, it will simplify and elucidate the
subject if we divide it into three classes: the first comprising alchymists…the
second comprising astrologers, necromancers, sorcerers, geomancers and all
those who pretend to discover futurity; and the third consisting of dealers in
charms, amulets, philtres, universal-panacea mongers, touchers for the evil,
seventh sons of a seventh son, sympathetic-powder compounders, homeopathists,
animal magnitisers, and all the motley tribe of quacks, empirics and charlatans.
This
citation, from Charles Mackay’s 1841 treatise examining the human propensity to
fall prey to panic-mongers and confidence men, offers a useful summary of the
various types of manipulation and rhetoric that have characterized the AGW
debate over the past decade and more.
The refusal of the AGW theorists to acknowledge and incorporate into
their model the first four “ugly facts” addressed in this paper – that it is not
unusually warm; that it is getting colder; and that while temperatures do not
correlate with carbon dioxide concentrations, they do appear to correlate with solar activity – might charitably be
ascribed, in Mackay’s idiom, to the work or influence of “erring philosophers.” The next three cases, however – the
vulnerability to market forces and outright fraud of attempts to treat “carbon”
like a commodity; the portrayal by politicians and politically-motivated
activists of “climate change” as a “threat”; and the repeated betrayals by the
proponents of the AGW thesis of the fundamental tenets of science – are
examples of what Mackay called “wilful cheats, who have encouraged or preyed
upon the credulity of mankind.”
This
chapter examines how “alchymists, sorcerers and charlatans” have been able to
create and/or exploit past economic panics and bubbles to generate profits from
insufficiently sceptical investors. The
purpose of this examination is to provide an historical context for a subsequent
discussion of the financial alchemy of carbon trading, through which one of the
two gases most important to life on Earth is transformed, first, into a poison
threatening global Armageddon, necessitating regulatory limits, taxation and
fines; and second, through the alchemy of “carbon credits”, into a commodity,
to be bought and sold in international markets with the political aim of
achieving massive reductions in the production of this horribly dangerous, yet
somehow marvellously profitable, substance.
Because
a discussion of these subjects necessitates a review of relevant historical
precedents, the following chapters are necessarily somewhat longer than the
foregoing ones, which – by virtue of the topics involved – focussed exclusively
on the scientific aspects of the AGW thesis.
I therefore beg the reader’s indulgence as I first delve into some
illustrative historical examples of what can happen when of humans make
decisions – especially economic decisions – without first engaging their
critical faculties.
John Law was born into a Scottish family of bankers
and goldsmiths in 1671, and enjoyed an eclectic and somewhat chequered career
as an economist and gadfly during the closing decades of the 17th
Century. Insufficient success as a
gambler and a surfeit thereof as a duellist (he was convicted, condemned, fined
and exiled after killing a man over a lover’s affections in 1694) led to his
removing to Paris, where he busied himself urging the creation of a national
bank and the replacement of coins with paper currency to compensate for the
declining availability of precious metals, due, inter alia, to the impact on the French national treasury of the
wars of Louis XIV. Law established, in
1716, the Banque Générale Privée. In theory, Law’s bank was private – but the
bulk of its founding capital consisted of government debt instruments.
The role of the government in underwriting his bank’s
activities notwithstanding, Law worked his institution like a private investor,
buying numerous companies and floating their stock in order to increase share
prices and income. His most daring
venture was the purchase of the Mississippi Company in 1717 (arguably to assist
the burgeoning French colony in Louisiana) and the floating of shares in a new Compagnie d’Occident that same
year. The Compagnie d’Occident was
granted an exclusive franchise over trade between North America and the West
Indies, making its stock enormously attractive to investors – a lure which was
only enhanced when Law’s bank became the Banque
Royale in 1718, meaning that its stock was thereafter guaranteed by the
Crown. Law then absorbed numerous other
companies, vastly increasing the bank’s holdings, and began trading shares in
the Mississippi company in exchange for government debt. Rampant speculation in the shares traded by
the bank led to inflation, and prices soared nearly forty-fold over the course
of the year. Law issued new shares,
reducing the value of existing shares – but the shares were not backed by
anything concrete. Law had offered
scintillating descriptions of the magnificence of the Mississippi venture,
especially its allegedly rich (“but alas”, one economist notes, “wholly
illusory”)
gold mines, but the reality was that there was no substance to his claims.
When investors realized this, a sell-off of stock
began, confidence collapsed, and with it, Law’s bank, obliterating as well the
financial underpinnings of the French government. The French regent appointed Law to the post
of Controller General of Finances in 1720 (a sterling example, if ever there
was one, of the unwisdom of reinforcing failure), but this did nothing to stem
the tsunami. The bank’s shares lost 97%
of their value when Law’s “Mississippi Scheme” imploded. Panicked investors tried to convert their
stock into hard currency, only to discover that the bank had virtually
none. Law was dismissed, forced to flee
France, and spent the last eight years of his life wandering Europe, eventually
dying in poverty in Venice in 1729.
At roughly the same time that Law was struggling to
maintain the solvency of his bank, the “South Sea Bubble” was bursting in
Britain. Formed in 1711 by the Lord
Treasurer, Robert Harley, the South Sea Company obtained exclusive rights to
the “South Sea”, i.e. South American, trade markets. The company assumed about seven and a half
million pounds worth of government debt in exchange for a perpetual annuity of
about one-fifteenth that amount, and issued shares predicated upon its trade
monopoly. The monopoly, however, never
paid off; the Treaty of Utrecht that concluded the War of the Spanish
Succession permitted the company to send only a single ship per year, and the
single trading voyage that took place (in 1717) made very little profit. Deterioration of British-Spanish relations in
1718 put the future of the company into doubt.
Notwithstanding these poor prospects, the company continued purchasing
government debt and issuing shares.
The soaring value of the South Sea stocks prompted a
nation-wide frenzy in investment; no get-rich-quick scheme seemed too bizarre
to be possible. Companies went public
promising everything from the mundane (“the importation of jackasses from Spain”)
to the sublime (“the wheel of perpetual motion”)
to the simply unimaginable (“an undertaking of great advantage, but nobody to
know what it is”). According to Mackay,
this latter adventurer had judged shrewdly the mood of investors:
The man of genius who essayed this bold and successful
inroad upon public credulity merely stated in his prospectus that the required
capital was half a million, in 5000 shares of 100l. each, deposit 2l. per
share. Each subscriber, paying his
deposit, would be entitled to 100l.
per annum per share. How this immense
profit was to be obtained, he did not condescend to inform them at that time,
but promised that in a month full particulars should be duly announced, and a
call made for the remaining 98l. of
the subscription….Crowds of people beset his door, and when he shut up at three
o’clock, he found that no less than one thousand shares had been subscribed
for. He was thus, in five hours, the
winner of 2000l. He was philosopher enough to be contented
with this venture, and set off the same evening for the Continent. He was never heard of again.
At this point, the unscrupulous began making their
influence felt; the company engaged in the wildest forms of propaganda about
the value and prospects of its stock.
Many members of the upper crust were enticed to participate, lending
their names to the endeavour and, as a result, binding their personal
reputations as well as financial interests to those of the company. The company was thereafter able to claim a
certain degree of legitimacy by publicizing the identities of its high-profile
investors. Speculation in, and “flipping”
of, shares caused the stock price to soar, from £120 in January 1720, to seven
times that six months later. Things came
to a head in June 1720 when the Royal Exchange and London Assurance Corporation
Act, passed the previous year, came into effect. The South Sea Company obtained such a
charter, boosting its stock further, to nearly £900 per share. This precipitated a sell-off as investors
tried to cash in. The Company attempted
to stabilize prices by buying back its own shares.
By August of 1720, when the stock price had reached
nearly £1000, the essential instability of the edifice that the company’s
managers had created began to make itself felt.
The collapse of John Law’s Mississippi scheme at about the same time
created a crisis of confidence among investors, which in the long run is the
bane of any economic bubble. The
sell-off of the stock gathered momentum.
The company responded by loaning money to investors to enable people to
buy the company’s shares, but the falling stock price meant that people could
not afford to pay back the loans other than by selling their shares. The collapse accelerated, taking down not
only the company itself, but also the banks and private investors that owned
its stock. A Parliamentary
investigation, struck in response to public outrage, subsequently revealed
widespread corruption among the company’s officers, and offered the following
eloquent conclusion:
And thus were seen, in the space of eight months, the rise, progress,
and fall of that mighty fabric, which, being wound up by mysterious springs to
a wonderful height, had fixed the eyes and expectations of all Europe, but
whose foundation, being fraud, illusion, credulity, and infatuation, fell to
the ground as soon as the artful management of its directors was discovered.
In
tracing the history of the South Sea Bubble, Mackay makes a crucial distinction
between an investor believing in the inherent logic of a scheme itself, and
believing that it will generate money regardless of its validity: “…it did not
follow that all these people believed in the feasibility of the schemes to
which they subscribed; it was enough for their purpose that their shares would,
by stock-jobbing arts, be soon raised to a premium, when they got rid of them
with all expedition to the really credulous.”
This is a crucial distinction, and illustrates both the fundamental importance
of the principle of caveat emptor,
and the hollowness of claims that the public were duped by unscrupulous
salesmen. “Nobody seemed to imagine”,
Mackay concludes acidly,
that the nation itself was as culpable as the
South-Sea Company. Nobody blamed the
credulity and avarice of the people – the degrading lust of gain, which had
swallowed up every nobler quality in the national character, or the infatuation
which had made the multitude run their heads with such frantic eagerness into
the net held out for them by scheming projectors. These things were never mentioned. The people were a simple, honest,
hard-working people, ruined by a gang of robbers, who were to be hanged, drawn
and quartered without mercy.
The
John Law and South Sea bubbles offer three lessons relevant to this study. The first, and from our perspective the most
important, is that neither stock-marketers nor investors must necessarily
believe in the logical feasibility of a money-making scheme; all that is
necessary is that they believe that it will generate income. Common-sense questions like “does this
business model/proposed technology/scientific idea really work” are ignored in
favour of the more important economic question: “can I recoup my investment and
make a profit?”, with the qualifying subtext, for the more practiced investor,
being, “can I do so before this hare-brained scheme collapses?” In a market economy, value is relative, not
absolute, and is accorded by the buyer rather than the seller. A thing has no intrinsic value; it is worth
only what someone is willing to pay for it.
It doesn’t matter if the thing being offered for sale is a jackass
imported from Spain, an unseen and entirely imaginary gold mine on the Gulf
Coast, or a share in an “undertaking of great advantage, but nobody to know
what it is”; it is worth what the prospective buyer is willing to pay. What this means in a more general historical
sense is that, if an idea is able to generate a profit, then the underlying
validity of the idea itself is, from an economic perspective at least, entirely
irrelevant. This fact is key to
understanding where “carbon trading” came from, and where it is likely to end.
The
second lesson that emerges from the spectacularly disastrous speculations of
the early 18th Century is that they foreshadowed contemporary
counterparts. The real-estate bubble of
the early 1980s was the result of precisely the same sort of behaviour on the
part of investors, speculators and managers as the John Law and South Sea
scandals. In each case, extant financial
mechanisms were manipulated by speculators to drive up share prices, while
investors – obeying the immutable law, stated above, that the idea underlying a
scheme does not have to make sense so long as it generates a return on
investment – poured money into the mill.
The real-estate bubble was the direct result of “flipping” – the rapid
(and for obvious reasons, illegal) turnover of properties between investors in
order to artificially inflate the price.
As with stocks flipped between investors in the South Sea Company in
1720 (or between investors and the Company itself), nothing real was created;
the enhanced “value” of the shares was an artefact of an entirely artificial
process, used by, and feeding the lust for profit of, people willing to pay the
inflated prices in expectation of further price increases. Naturally, in all cases the edifice collapsed
when sellers could no longer find buyers willing to pay the
artificially-inflated prices.
The
same mechanism was at work in the economic crisis that precipitated the Great
Depression. As Galbraith notes,
…the collapse in the stock market in the autumn of
1929 was implicit in the speculation that went before. The only question concerning that speculation
was how long it would last. Sometime,
sooner or later, confidence in the short-run reality of increasing common stock
values would weaken. When this happened,
some people would sell, and this would destroy the reality of increasing
values. Holding for an increase would
now become meaningless; the new reality would be falling prices. There would be a rush, pell-mell, to unload. This was the way past speculative orgies had
ended. It was the way the end came in
1929. It is the way speculation will end
in the future.
The
same dynamic also precipitated the collapse of the sub-prime mortgage industry
in the United States in 2008. That
industry’s operations were predicated entirely on financing otherwise
unsustainable levels of debt by assuming that property only ever increases in
value – an historically ludicrous presumption.
Moreover, as was the case in both the John Law and South Sea scandals,
the collapse was exacerbated by the fact that the government was a major
share-holder. In retrospect, of course,
the fundamental instability of such systems is patently obvious, which begs the
question: Why do people buy into a scheme when they know it cannot go on indefinitely? That, of course, is answered by the first
lesson: they do so because they think they can always sell something for more
than what they paid for it.
The
third lesson lies not only in the fact that Ponzi schemes inevitably fail, but why they fail. They fail because inflationary speculation is
predicated not only upon a logical impossibility – that of ever-increasing
value, a proposition as improbable in historical terms as perpetual motion is
under the laws of thermodynamics – but also upon an infinite progression of
investors: an inexhaustible supply of people who believe that they will be able
to make their money, and get out before things go sour. Notwithstanding P.T. Barnum’s contention that
a “sucker” is born every minute, however, statistically speaking, the supply of
credulous investors is not inexhaustible.
Sooner or later – as John Law, the directors of the South Sea Company,
and all speculators before and since have discovered to their sorrow – the
shareholders wise up. The first to do so
sells earliest and therefore suffers the smallest loss; but it is often his
flight that precipitates the mass exodus which, in turn, brings the whole
edifice crashing down.
The
“innovative financial scoundrels” who should be called to account, by contrast,
often escape judgement (occasionally because, as in the case of the author of
the “undertaking of great advantage”, they managed to escape with their profits
before the collapse); but when they do not, it is invariably they who are
blamed for the losses. They stand
condemned and vilified as “artful managers” by a “simple, honest, hard-working”
people who, it often seems, are outraged not so much by their financial losses,
as by the fact that their cupidity, naïveté, and greed have been exploited –
and worse, exposed.
The
activities of investors and speculators during the John Law and South Sea
Bubble disasters – and, for that matter, in the lead up to and collapse of
securities and real estate prices in, respectively, the late 1920s and early
1980s – were understandable at least in the sense that, in each case, things of
alleged (if vastly over-inflated) value were being bought and sold. Other cases of peculiar economic behaviour,
however, do not offer the historian even this much explicatory
consolation. Two cases that illustrate
this phenomenon – separated by nearly a score of generations in terms of time,
but by hardly an angstrom in terms of human behaviour – are the Dutch tulip
craze of the early 17th Century, and the American “dot-com” craze of
the late 20th Century.
These
two cases are similar to those described above in the sense that, like the
South Sea and John Law scandals, the Tulip and the dot-com frenzies each
resulted in an inflationary bubble.
Where they differ is in the fact that, in these latter cases, unlike in
the former, investors knew precisely what it was they were buying, knew that
their purchases were horribly overvalued, and knew that a bursting of the
bubble was inevitable. And yet they
bought anyway. A cursory review of these
two cases offers further useful lessons on the nature of human economic
behaviour.
The
“Tulipomania” that afflicted Holland in 1636 and that was popularized by Mackay
in Extraordinary Popular Delusions and
the Madness of Crowds has in recent years come under more in-depth scrutiny
as economists and social historians alike have attempted to glean, from scarce
historical data, a better understanding of the nature of economic bubbles. Mackay alleges that the tulip craze was a
classical bubble in the sense that, in the words of one economist, “people pay
a crazy price and people trade like crazy.” According to Mackay, “the rage among the
Dutch to possess [tulips] was so great that the ordinary industry of the
country was neglected…many persons were known to invest a fortune of 100,000
florins in the purchase of forty roots.” By any measure, 2500 florins for a single
tulip bulb, when the average annual wage for a tradesman at the time was
something on the order of 150 florins, qualifies as a significant expenditure.
But
was it “crazy”? According to Mackay’s
interpretation of the events of the 1630s, “crazy” may have been too mild a
term; bulbs of desirable species were allegedly sold for prices as high as 4400
to 5500 florins, while one example of a Semper
Augustus bulb was reputed to have been purchased for “4600 florins, a new
carriage, two grey horses, and a complete set of harness.” This sort of behaviour, of course, could not
last, and when “the more prudent” (to use Mackay’s term) realized that “somebody
must lose fearfully in the end”, the extravagant prices began to fall, and the
tulip bubble burst.
Contemporary
re-examinations (to the extent that such are possible, given the paucity of
detailed economic data from the period in question) have challenged Mackay’s
interpretation of events, even to the extent of arguing that the vast increase
in prices was the result not of classical “bubble” behaviour, but rather a
rational market response to contemporary events and regulatory changes. To a certain extent, “faddishness” is a
characteristic of the wealthy, and individuals with excess disposable income
are both predisposed and able to pay what others would deem “crazy” prices for
luxury items, whether those items are designer dresses in Hollywood,
cube-shaped melons in Japan, or grossly overpriced apartments in trendy
Manhattan neighbourhoods. Galbraith
points out that affluence is a necessary precondition for the formation of an
economic bubble. The desirability of
certain varieties of tulip bulbs, therefore, and the relative wealth of the
upper crust of Amsterdam society at the time, must account for some portion of
the price increase.
Historical
events may also have played a role. At
the time of the mania, Europe was a generation into the 30 Years’ War. One author suggests that the Swedish defeat
of a German army (under John George I of Saxony) at Wittstock on 3 October 1636
led to a revolt among the German peasantry, giving German nobles something to
think about besides purchasing luxuries, and – as a result – leading to a
decline in, inter alia, the price of
tulip bulbs in Holland. Because contract prices were already fixed by
this time, however, investors began to worry about the impact on their
contracts if prices fell rather than rose.
At this point, it is important to note that the tulip bulb market was in
essence a futures market; the bulbs were collected and replanted in September
in anticipation of delivery the following spring. The prices specified in tulip contracts were
therefore by definition speculative.
Moreover, at the same time, a regulatory change (possibly driven by
politically-connected investors concerned about spiralling prices) transformed
the nature of those contracts; in order to insulate purchasers against the
effect of inflationary price spikes, those purchasers could now break their
contracts by paying only a fraction of the value thereof (Mackay says 10%;
others have put the penalty at 1/30th of the original contract value
or 3½%).
This
turned futures contracts into options contracts, leading investors – according
to modern analysts – to be more willing to risk high prices, because they could
escape from the contracts at minimal cost.
Contra Mackay, they argue, the
resulting price spikes in tulip bulb options were a rational response by the
market, rather than bubble behaviour attributable to “the madness of crowds”.
Interestingly,
from the point of view of the present study, Mackay’s interpretation offers
fewer lessons than that preferred by the modern re-interpreters of the events
of the 17th Century. If
Mackay is right, then the Dutch “tulipomania” was indeed an example of how
actions that may be rational on an individual level – e.g., agreeing to
purchase tulip bulbs at a high price, and then reselling them to another buyer
at an even higher price – can collectively turn into irrational group
behaviour. This is interesting, but from
the perspective of the present study, it does not offer much in the way of
generalizable historical lessons.
If,
on the other hand, the modern economists are correct, then the increase in
prices for tulip bulbs in Holland in 1636 demonstrates how government
intervention in the market can have unintended consequences. As one analyst puts it, “contract prices
soared to reflect the expectation that the contract price was now a call-option
exercise, or strike-price rather than a price committed to be paid for future
bulbs.” The transformation of tulip contracts from
futures to options was designed to insulate investors from the adverse
consequences of making bad predictions, but the result was a price spiral in
the tulip market, followed by a price crash.
The latter would no doubt be seen in some quarters as an “adjustment” of
the price of tulip bulbs towards something more representative of their actual
market value (in the sense of “what someone was actually willing to pay for
them”), and of course it was. But what
is interesting is that it came about not in response to market pressures, but
rather as a result of government intervention in the market.
The
rise and fall of the first wave of internet-based businesses in the mid- to
late 1990s offers another perspective on the phenomenon of economic
bubbles. The “dot-coms” (a euphemism for
internet-based companies, generally with evocative names followed by the suffix
“.com” to complete the website uniform resource locater) began to take off in
1995 in tandem with the explosion of the internet. The rapid expansion of this new industrial
sector was fuelled by a combination of web-based services and a concomitant
boom in the high-tech sector, which saw vastly increased sales of the
communications and computer equipment necessary to support the internet
explosion. Over the next five years, the
tech-heavy NASDAQ Composite Index gained nearly six-fold in value, with 50% of
the increase coming in the period 1999 to 2000.
On 10 March 2000, however, the bubble burst; and by mid-2003, the NASDAQ
had fallen back to 1996 levels – roughly a quarter of the peak it had achieved
at its height.
The
explosion of the dot-coms in the mid-1990s was largely the result of two
concurrent phenomena: a massive and sudden technological transformation (the
internet coupled with, and created by, continual improvements in processor
speed and the capacity of electronic memory), and the availability of large
amounts of venture capital as a result of a particularly strong economy in the
US. The phenomenon was characterized by
the emergence of a new business model: to run a new business at a loss,
concentrating on growth rather than return on investment, on the assumption
that revenue generation would follow once a given company was “big enough” to “dominate”
whatever sector it had set its sights upon.
As in any Darwinian environment, those who succeeded were vastly
outnumbered by those who perished, and estimates for the number of business
failures suggest that as many as 90% of all internet start-ups in the 1990s
ultimately failed. Those who survived
the Darwinian winnowing did well; the bubble left behind a number of
sector-dominating giants, notably Google and Amazon.
This
period of extraordinary growth produced a new business term: “burn-rate”, where
non-revenue-generating growth – i.e., how fast a new start-up went through its
allotment of venture capital – was deemed a measure of success. It also loaded the market with high-tech
jobs, especially in the programming and communications fields, many of which
were lost when start-ups failed. The
initial public offerings of stock in many of these companies were eagerly
snapped up, netting enormous paper sums, and generating vast enthusiasm and
excitement for the industry – precisely as the stock offerings for the
Mississippi company had done in the early 1700s. Indeed, the peculiar obscurity of many of the
areas of endeavour during the dot-com boom bears a remarkable semantic
similarity to the “undertaking of great advantage, but nobody to know what it
is”, stock options for which were heavily subscribed in London in 1720. In many cases, the venture capital expended
during the 1990s by these “men of genius”, to borrow Mackay’s phrase,
disappeared into the ether just as assuredly as if an unscrupulous
fly-by-nighter had decamped with a satchel full of guineas.
The
dot-com bubble emerged, evolved, expanded and imploded in exactly the same way
as its predecessors. Confidence – in the
booming economy, as well as in the promise of new technologies – fuelled
investment, which in turn led to speculation.
Share prices soared in a self-reinforcing spiral. The hard technology companies contributed
their own share to the dynamic, posting record profits as businesses and
governments hastened to upgrade their communications infrastructure in order to
ensure that they didn’t miss out on the coming “information economy” (an
expression which, along with “paperless office”, “telecommuting”, and “networking”,
came into vogue at about this time).
Equipment sales, installation fees and the like at least represented a
solid investment in tangible goods and services, differing from inflated share
prices in at least two significant ways: first, they were real; and second,
they were periodic, and had an expected lifespan. This latter characteristic proved to be a
problem for the hardware industry, which (like any industry) thrives on
continual sales. Once an upgrade is
complete, another may not be needed for several years. After feast, comes famine.
Analysts conducting a post-mortem of the
dot-com collapse point to a number of key factors that, taken together,
launched, sustained and eventually sank the industry. At the strategic level, the economy, after
running very hot for three quarters of a decade, was beginning to slow down;
the Federal Reserve, in order to prevent inflation, had implemented a number of
interest rate increases between 1999 and 2000, putting a damper on the
availability of low-interest venture capital.
Another possible influence included the issuance, on 5 November 1999, of
findings of fact by a Federal judge in United
States vs. Microsoft, asserting that Microsoft constituted a monopoly in a
landmark anti-trust case. This sent a
shudder through the high-tech industry.
The judge’s ruling was due to be handed down on 3 April 2000, and
anticipation of a sell-off is thought to have played a role in influencing
buy-sell decisions on technology stocks in the weeks leading up to that date. Some analysts have also argued that a
confluence of pre-programmed sell orders for technology stocks triggered other
computerized trading orders programmed to begin selling in a falling market to
minimize potential losses (a thoroughly logical precaution from a
profit-maximization perspective, but one which, in practice, equates to trying
to stop a flood by opening the fire hydrants).
Finally, it has been suggested that the non-event of Y2K after years of
build-up and doom-mongering predictions about the impending collapse of
world-wide computing and communications infrastructure may have played a role
in the collapse of technology stocks.
Businesses and government had spent much of the late 1990s upgrading
their technology to prevent Y2K, with the result that no further upgrades were
necessary for some time after the dreaded date had passed. This led to a precipitous drop-off in
equipment purchases, and a resulting decline in the value of tech stocks.
As
is always the case, the bursting of the “tech bubble” was followed by layoffs,
consolidations, bankruptcies, mergers and closures as the decline of the
dot-com “sector” accelerated. By some
estimates, when the dot-com bubble burst, more than $5 trillion in “paper value”
was wiped out (this figure was estimated by looking at the NASDAQ, which stood
at $6.7 trillion in March 2000, and $1.6 trillion 30 months later). Much, if not most, of this figure may
represent inflationary value, but it also included enormous amounts of start-up
venture capital that fell victim to the unprecedented “burn rates” that were
the inevitable by-product of the get-big-quick business model. A great deal of capital, both real and
inflationary, was volatilized when the dot-coms went under, leaving in their
wake an economic landscape littered with out-of-work employees and angry
investors, and hordes of analysts and economists arguing about why it had
happened.
All
they had to do was look at the past. The
dot-com bubble was nothing more than yet another iteration of a classical
economic bubble in which investors, flush with money due to a booming economy,
were prepared to pump large quantities of capital into projects that promised
an enormous rate of return to whomever could, in the words of Nathan Bedford
Forrest, get there “firstest with the mostest”.
As with the South Sea Bubble, having a proposal to invest in seemed less
important than the rationality of the proposal itself; all that mattered was
the prospect of achieving a huge return on investment. There is something ironic in the fact that
people tend to weather difficult economic times, preserving wealth by being
sceptical about investment opportunities, whereas – pace Galbraith – one of the features of bubbles is that they tend
to occur in strong economic times, when investors are more likely to be
profligate in pursuit of even greater wealth – and, as a result, often end up
poorer than before.
At
time of writing, it appeared that the second internet business revolution was
under way. Venture capital, in response
to the strong performance by internet giants like Google and Amazon, and
upstart businesses like Wikipedia, eBay, Youtube, Facebook and MySpace, was
once again becoming available. Some
industry analysts were wondering whether the second wave of internet businesses
would have a higher success rate, noting that, on average, the Western
countries had ten times as many internet users as in the mid-1990s. If a second revolution is indeed underway, it
will probably be lower-key and far more cautious than the first. We cannot rely on investors remembering the
grotesque excesses of the 1990s and the horror of the dot-com collapse, because
– as history demonstrates – memory weighs light in the balance against the
prospect of the “next big thing”. It is
more likely that risk calculations will be dampened by the constrained
financial climate in the wake of the collapse of the sub-prime mortgage
industry in the US, the clamour for “bailouts” and “stimuli” reaching into the
trillions of dollars, and the uncertain future of large corporations and
taxation schemes at the hands of the Obama administration. These considerations are likely to make even
the most ardent and venturesome of capitalists protective of their remaining
wherewithal.
Like
the John Law scandal and the South Sea Bubble, the Dutch tulip craze and the
collapse of the dot-coms offer a variety of lessons relevant to the present
study. The first is that bubbles tend to
occur during relatively strong economic circumstances, when investors have
excess capital, are looking for opportunities, and are willing to tolerate
riskier ventures. Constraints on
investment capital tend to make investors more cautious and lest prone to
risk-taking. The second lesson is the
same one that emerged from the crises of 1720 – that economic bubbles result
from the expectation of profit, rather than from any conclusion, based on
objective assessment, that a proposal is rational or even possible. And the third – as demonstrated by the Dutch
government’s attempt to stem the tide by changing the laws regulating the
purchase of tulip “futures”, turning agreed sales into “options contracts” – is
that government intervention to stem a crisis can have unintended consequences,
and can worsen an emergency instead of mitigating it.
As
the world begins to flirt with the widespread trading of “carbon credits”, all
of these factors are present, and in spades.
With him there rode a noble Pardoner
Of Rouncival, his friend and his compeer;
Straight from the court of Rome had journeyed he.
…
His knapsack lay before him in his lap,
Stuffed full with pardons brought from Rome all hot.
…
Well could he read a lesson or a story,
But best of all he sang an offertory;
For he knew well that when that song was sung,
Then must he preach, and all with smoothened tongue.
To gain some silver, preferably from the crowd;
Therefore he sang so merrily and so loud.
The Chicago Climate Exchange, headquartered on South
LaSalle Street in the Windy City, bills itself as “North America’s only
cap-and-trade system for all six greenhouse gases”. The Exchange operates in conjunction with the
“Chicago Climate Futures Exchange”, “a landmark derivatives exchange that
currently offers standardized and cleared futures and options contracts on
emission allowances and other environmental products.” In essence, the Exchanges provide North
American businesses the opportunity to voluntarily purchase “carbon credits” in
a futures market, much as one would purchase oil futures, pork belly futures,
or even tulip futures. The trading of “carbon
credits” is, naturally, subject to a brokerage fee, and the trading agency also
sustains itself from the delta between buying and selling prices.
(The scientific credibility of the Exchange’s business
model, incidentally, may be judged by the fact that water vapour – which is by
far the most prevalent greenhouse gas in the atmosphere, and is roughly four
times as effective a greenhouse agent as carbon dioxide – is not one of the “six
greenhouse gases” traded. This is
perhaps not surprising, as establishing a cap and trade regime for steam could
adversely impact the price of a decent cappuccino.)
What, exactly, is a “carbon credit”? In essence, it is permission, purchased in
advance, to emit a given quantity of gaseous carbon dioxide as a result of
combustion or other industrial process.
The sale of “carbon credits” has existed for some time; Europe has
established a large carbon trading market, and websites in Canada and the US
offer “carbon credits” (generally called “carbon offsets” when sold on a retail
basis) for purchase. Examples of offset
retailers include: Offsetters.ca, carbonzero.ca, climatecare.org,
greenlife.com, carbonneutral.com, climatetrust.org, self.org, nativeenergy.com,
betterworldclub.com, terrapass.com, carbonfund.org, carboncounter.org,
climatemundi.fr, vanrenewable.org, targetneutral.com, livclean.ca,
carbonpassport.com, co2balance.com.
These, incidentally, are only the “carbon credit”-peddling organizations
listed on the website of environmental activist David Suzuki.
What, exactly, do you get when you buy a “carbon
offset”? According to
carbonpassport.com, a UK website, buying carbon offsets is “a responsible way
to neutralise the carbon emissions we cannot avoid creating at home, when
travelling or in business.” An internal
flight within the UK, the site informs us, can be “offset” for “as little as
£3.”
The site further advises that “when you offset your carbon footprint with
Carbon Passport you can choose to buy a car sticker or fridge magnet and will
receive a personalised offset certificate” signed by the Director of Carbon
Passport Limited, and showing how many “tonnes of greenhouse gases” the
purchaser has “offset.”
Carbon credits have been derided by many in the
community of global warming sceptics as “selling hot air”. This is not precisely correct; someone who
purchases a carbon offset or carbon credit under a mandatory trading scheme is
purchasing permission to emit carbon dioxide, while someone who does so in a
voluntary regime is purchasing absolution for doing so. The surreal nature of the “carbon credit”
concept is explicable only in terms of a number of inter-related
phenomena. The first of these is the
principle, outlined above, of relative value, in which there is no such thing
as “intrinsic worth”, and value is established only when someone buys
something, thereby establishing a price.
This is the foundational principle of market economics, and it applies
to greenhouse gases as much as it does to gold or grain. In 1989, the National Gallery of Canada
bought a famous painting, “Voice of Fire” by Barnett Newman, for $1.8M. Critics of the purchase argued that the work
– an enormous canvas consisting of three vertical red and blue stripes – was
not “worth” that much. Such arguments
fly in the face of economics; “Voice of Fire” was worth $1.8M because the
Gallery had paid that much for it. The
value was set by the act of purchase. In
the same way, when trading closed at the Chicago Climate Exchange on 27 January
2009, a metric tonne of CO2 was worth $2.05 USD – not because CO2
has any intrinsic value, but simply because that’s what buyers were paying for
it.
Like 17th century tulips, 21st
century carbon dioxide can be bought in a futures market as well. At the same close on 27 January 2009, carbon
credits for December 2009 were going for $2.15, while credits for December 2013
were going for $12.25. If the permission
to emit a tonne of carbon dioxide is indeed a commodity likely to be valuable
in the future, then why not treat it like one?
Brokers, after all, buy oil futures today, betting against the likely
future cost of a barrel of oil; why not do the same thing with carbon credits,
betting against the likely future cost of a tonne of carbon dioxide?
The answer, of course, is because the price of a “future
tonne” of carbon dioxide depends entirely upon the continued validity of the
theory that anthropogenic carbon emissions are the main driver of climate and
the principle source of planetary woe.
That thesis, as demonstrated above, has failed. Value, however, is based not on theory but –
as seen in past bubbles – on confidence.
When confidence finally collapses, so too will the price of a tonne of
carbon dioxide. All of the money spent
buying “carbon futures” will have been wasted.
It will not, however, have been “lost” (just as the golden guineas paid
to subscribe stock in Spanish jackasses were not “lost”), because with the
exception of the brokerage fees charged by the trading house, the money paid to
buy “carbon futures” will have gone to the individuals and organizations “selling”
the credits – in many cases, foreign governments who, like Russia, have “carbon
credits” to sell because the target dates for emissions reductions set in the
Kyoto Accord ante-dated the economic collapse precipitated by the dissolution
of the USSR. In other words, the money
paid for carbon credits will have gone to governments and businesses in other
countries. I leave it to the reader to
ascertain how this benefits the Western nations, governments and citizens out
of whose pockets this money came. Or,
for that matter, how it benefits the planet.
A recent article in Der Spiegel illustrates how, in obedience to the law of unintended
consequences, carbon credits may in fact be working counter to what they were
intended to achieve. Germany is making
great strides in adopting wind power as an alternative energy source, and is,
at present, the world leader in the field, with over 22 GW installed capacity.
The increasing availability of wind-generated electricity is allowing German
fossil-fuelled power plants to lower production. However, the total number of EU-issued
emissions certificates remains the same; thus, widespread adoption of wind
power in Germany means that more “carbon credits” are becoming available,
leading to lower prices. This allows
other, older, less environmentally-friendly electrical generating stations in
Eastern Europe to purchase credits to allow more generation – and, therefore,
in addition to more “carbon emissions”, a good deal of real pollution as well.
Thanks to the EU emissions-trading scheme, Germany’s installation of wind
turbines amounts a “license to pollute” for Soviet-era coal-fired power plants
in places like Poland and Slovakia. The immutable laws of the marketplace – which
dictate that the price of a good is inversely proportional to its availability
– are making it easier and cheaper for high-output polluters to purchase
absolution in the form of carbon credits than it is to invest in cleaner
production technologies.
Will carbon prices collapse? In Europe, this is already happening; over
the past six months, the price of a tonne of carbon dioxide has plummeted from
€31 to €8.20, a decline of close to 75%.
Could the same thing happen to carbon “prices” in the US market? To answer this question, one need only look
at what is holding them up. The only
reason a “credit” to emit a metric tonne of carbon dioxide is worth anything at
all is because the present climate panic attributes global warming, as it is
defined by the alarmist lobby, to anthropogenic greenhouse gas production. Companies that emit greenhouse gases are
hedging their bets, buying carbon credits at today’s “low prices” in order to
offset anticipated future emissions, when carbon credits – according to the
same companies that are selling them – are expected to be more expensive.
All of this makes perfect economic sense – or it
would, if there were any evidence that human-produced carbon dioxide had any
measurable impact on climate. The fact
that it does not has still not been acknowledged by Western governments, most
of which, in obedience to political strong-arming by the alarmists, continue to
flirt with the idea of imposing carbon taxes and carbon trading schemes. Do carbon taxes actually reduce
emissions? In 1991, Norway became one of
the first countries in the world to impose a tax on GHG emissions. Since then, Norway’s GHG emissions have risen
by 15%. According to the US Energy Information
Administration, America’s untaxed carbon dioxide emissions grew by 16% percent
over the same period. It is difficult to
see what Norway achieved – other, of course, than to significantly increase the
cost of energy to consumers. Simply put,
the European Union’s experience with carbon taxes and carbon trading has seen
market price collapses and a transfer of emissions from relatively modern
Western European power plants to ‘dirty’ Eastern European power plants. By any measure, it has been an utter fiasco.
What happens to “carbon markets” when word about the
failure of the AGW thesis gets out? The
facts about the insignificance of anthropogenic carbon emissions in the climate
equation will eventually reach a wider audience. When they do, the price of CO2
will collapse, reverting to its actual value (nothing). By then, of course, it may be too late; the
money spent on carbon taxes and carbon credits will be gone, and those whose
investments have evaporated will decry, as they always do, the “gang of robbers”
that bilked them – forgetting that any con game has two players: the artist
running the scam; and the dupe who allows himself to be taken in by it.
How much money have companies already spent to
purchase carbon credits and carbon futures?
How much money have well-meaning but ill-informed private citizens spent
to “offset” activities like driving to work, picking up groceries, or taking
the kids to soccer practice? How many
pension fund managers have bought into the carbon market, on Al Gore’s personal
assurance that the price of hot air is only going to rise? Where has that money gone? How much of it has ended up in the pockets of
individuals and corporations established solely for the purpose of profiting
from the economic opportunities offered by the climate panic? How much will disappear when the whole
ridiculous edifice comes crashing down, as – in accordance with the historical
behaviour of all economic bubbles – it eventually must?
Who – if anyone – will be held accountable for
creating the carbon bubble in the first place?
On 6 April 2008, Generation Investment Management, a
private equity fund chaired by Al Gore, bought a 9.5% stake in Camco
International Limited, a company billed as a “carbon asset developer.” Camco at the time had one of the world’s
largest portfolios of carbon credits, and according to its prospectus, “generate[s]
carbon credits” and then arranges their sale and delivery “to international
compliance buyers and into the voluntary market.” This is not a difficult dynamic to
understand: as a result of this stock purchase, Al Gore stands to benefit,
personally and substantially, from the growth of the carbon credit market, and
from any increase in the value of carbon credits.
It is interesting, in view of this fact, that Gore,
testifying to the Senate Foreign Relations Committee on 28 January 2009, made
the following statement:
Quickly building our capacity to generate clean
electricity will lay the groundwork for the next major step needed: placing a price on carbon. If Congress
acts right away to pass President Obama’s Recovery package and then takes
decisive action this year to institute a
cap-and-trade system for CO2 emissions – as many of our states and many
other countries have already done – the United States will regain its
credibility and enter the Copenhagen treaty talks with a renewed authority to
lead the world in shaping a fair and
effective treaty. And this treaty must
be negotiated this year.
Not next year. This year.
Cui bono? Surely the
relationship between Gore’s business activities and his insistence that the US
government take steps to institute obligatory carbon trading – “Not next
year. This year” – is neither irrelevant
nor immune from scrutiny. Gore is
pressing the government of which he was once a member to take regulatory action
in an area where his own corporate and financial interests are intimately
engaged. It is remarkable that
legislators and journalists are not asking the obvious questions. Or perhaps – in view of Gore’s high public
profile, his unique status as an Oscar- and Nobel Prize-winning former
Vice-President, the fact that he is a Democrat, and his newsworthiness as a
full-time prophet of climatic end-times – it is not remarkable at all.
Why “this year,” and “not next year”? Whence comes this urgency? It cannot be because the planet is warming
catastrophically, because it is not; indeed, as has been shown above, it is
cooling, and if anything is likely to continue to cool over the coming
decades. What will another year or two
of cooling do to the value of the carbon credits held by Generation Investment
Management?
Or perhaps the urgency is due to the spreading
realization – not just by scientists, but by the public – that human activity
does not appear to significantly impact climate. Perhaps it is due to the increasing numbers
of scientists who are openly opposing the global warming orthodoxy. Perhaps it is the growing understanding by
Western electorates that “global warming” does not, in fact, pose the dire
threat to humanity that catastrophists predicted. A Rasmussen poll released in January 2009
showed that more people (44%) believed that global warming is due to planetary
trends than to human activity (41%).
Only three years ago, the spread was 11 points in the other direction;
in April of 2008, 13 points. The reversal of public opinion on the causes
of climate change is bad news for politicians bent on forging an international
pact to regulate carbon emissions. And
it is disastrous for anyone who has a stake in the carbon market. After all, carbon credits are not worth what
you paid for them, but only what someone
else is willing to pay to buy them from you.
If the AGW thesis is wrong – and based on observed
data, it is – and human-produced carbon dioxide has no significant impact on
climate – and based on observed data, it doesn’t – then carbon credits are
worthless. Once investors realize this,
the carbon market will swiftly go the way of tulip bulbs, dot-com stocks,
imaginary gold mines in Mississippi, jackasses from Spain, and other “undertakings
of great advantage, but nobody to know what they are.” As noted above, whenever an economic bubble
pops, the first investor to bail out loses the least money. But his flight may also accidentally spark a
sell-off, creating a collapse where there was none before. Anyone holding a large portfolio of a carbon
credits would be ill-advised to attempt to sell, as other investors would take
the large portfolio-holder’s actions as a vote of non-confidence in the stock,
potentially precipitating the very collapse that he or she hopes to avoid. Moreover, the act of selling requires a
buyer. A collapse of the carbon market
sparked by the implosion of the AGW thesis would by definition preclude a rebound
in prices. In such circumstances, who
would be so foolish as to buy carbon credits on the down-tick?
The caliphs of carbon are caught in a cleft stick of
their own cutting, deeply enmeshed in a market whose existence is predicated
upon a scientific theory that has demonstrably failed. The carbon bubble is over-ripe and ready to
burst; the only question is who will be the first to jump. What is perhaps most distasteful in this
whole enterprise is the fact that “carbon credits” have been sold to a credulous
public as a moral obligation; a means of offsetting the damage allegedly caused
to the environment by the mundane, day-to-day activities of the citizens of the
advanced, industrialized countries. The
panjandrums of climate panic tell us, day in and day out, that emitting carbon
is sinful. How convenient, then, that
the well-meaning but scientifically naïve citizens should be able to assuage
their guilty environmental consciences by funnelling a few dollars here and
there to foreign governments via a helpful middleman, who merely siphons a
pittance off the top.
We’ve seen such “helpful middlemen” before – in the
cynical opportunists who peddled indulgences to the unlettered medieval
peasantry, enabling them to purchase, on behalf of the deceased, remission of
some of their allotted time in purgatory.
These “pardoners” routinely described, in gruesomely vivid prose, the
tortures and torments that those poor, condemned souls were forced to undergo;
and from which they might be reprieved, if their living relatives would only
part with a few coins. Chaucer depicted
these practices in prose that is startlingly reminiscent of the modern heirs of
those “innovative financial scoundrels”:
I stand up like a scholar in pulpit,
And when the uneducated people all do sit,
I preach, as you have heard me say before,
And tell a hundred false jokes, less or more.
…
Of avarice and of all such wickedness
Is all my preaching, thus to make them free
With offered pence, the which pence come to me.
For my intent is only pence to win,
And not at all for punishment of sin.
*****
That was from a paper completed in April 2009. Where do we stand
today? The Chicago Climate Exchange is gone, shuttered by its parent
company due to unprofitability. Temperatures have not increased
statistically since 1995, and have declined over the past
decade. Sea level increase has stopped and sea levels haven’t risen
for four years. Arctic ice continues to recover (and this year’s
refreeze began earlier than at any time in the 32-year satellite
record). Empirical evidence identifying the Sun as the primary
driver of Earth’s climate continues to accumulate, and there is still no
empirical evidence linking human-produced CO2 to
climate. Public opinion is swinging away from the contention
that carbon dioxide is the principal driver of globo-climatic
warmo-disruption; the release of the ‘climategate’ emails has given us
valuable insight into the inner workings and mindset of the climate science
clique; seven out of ten poll respondents believe that climate
scientists have falsified results; carbon credits are worthless
at $0.05 per tonne; taxpayer-subsidized “green” schemes are going
belly-up all over; climate legislation has failed abysmally in the
US; and both Obama’s EPA and our own Environment Ministry have announced
that impending (and potentially ruinous) GHG regulations will be put
on hold in order to avoid plunging North America further into the economic
abyss.
We appear, in
short, to be witnessing the slow, spectacular, and gratifyingly
flatulent deflation of the carbon bubble. A year from now, what will
the folks who purchased carbon credits have to show for their investments,
other than chintzy certificates and smug bumper stickers? At least
when the Tulip mania collapsed in 1637, the folks who paid thousands of florins
for a single varietal could still eat the bulb.
And yet, Al Gore hasn’t
given up selling the carbopocalypse. Makes you wonder how many
5-cent-per-tonne carbon credits are rattling around in his portfolio.
Cheers,
//Don//
Notes:
A)
[http://www.ajc.com/news/nation-world/obama-admin-reworked-solyndra-1182334.html]).
B)
[http://www.telegraph.co.uk/earth/energy/windpower/8770937/Wind-farm-paid-1.2-million-to-produce-no-electricity.html]
C)
[http://www.ottawacitizen.com/business/Ontario+green+energy+figures+fail+impress/
5422519/story.html]
D) [http://www.carbon49.com/2010/04/ontario-feed-in-tariff-program-8-billion-of-deals-so-far/]
