A Change in Climate Is Coming — Part One

Cast your mind back to early 2007.

Kevin Rudd — the then Opposition Leader — was in full Kevin ‘07 mode. Crafting his public image with regular appearances on morning TV. Friendly, jovial Kev. Engaging the younger generation with his ‘new and progressive’ approach. Rudd, the hipster, was a contrast to boring old John Howard…except when it came to managing the nation’s finances.

He vowed and declared in an ABC interview:

I am an economic conservative, I’m proud of that fact, and that means delivering a healthier budget bottom line than he [Howard] did.

Well, we know how that promise worked out. KR’s great gift was in telling people what they wanted to hear.

On 31 March 2007, Kevin Rudd spoke at the National Climate Summit held in Canberra.

During this address, KR famously declared climate change to be ‘the great moral challenge of our generation’.

The greenies went ballistic with joy. The millennials cheered as one. And those on the inside, well they sensed (correctly) the climate change ‘gravy train’ was about to leave the station.

On the other side of the Pacific in May 2007, Ben Bernanke (US Federal Reserve Chairman) also made an (in)famous declaration:

We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,

Climate change was a great moral challenge.

But what about rising debt levels?

Debt denialists assured us that no harm was headed our way.

Irresponsible and fraudulent lending practices would have no significant impact on the rest of the economy or to the financial system.

The US and European lending environment were being heavily polluted with toxic debt. And what did the authorities do?

Were there any national debt summits to reduce the input of these toxins into the financial system?

Nothing. Blind eyes were turned.

The duplicity of policymakers is galling.

What really is the greatest moral challenge of not only our generation, but of future generations?

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Climate change or debt or both?

According to the United States Environmental Protection Authority (US EPA), aggregate emissions in the US have been declining since 1970…while population, miles travelled, and economic output has increased. This is a promising trend.

Comparison of Growth Areas Declining Emissions

Source: EPA

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While CO2 emissions in the US are trending slightly lower, it’s a different story on a global basis…CO2 is rising.

Annual Total CO2 Emissions

Source: Our World in Data

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On a country-by-country basis the trend is mixed.

The Western world (EU and the US) is curbing its CO2 output.

While the developing world — primarily China and to a lesser degree, India — has been increasing its CO2 output since the 1980s.

We’ll come back to the importance of increased global CO2 emissions shortly.

When Bernanke assured us that ‘subprime would be contained’, global debt — according to McKinsey — was around US$140 trillion.

Here’s an update on that debt figure from this Bloomberg headline in February 2021:

World's $281 Trillion Debt Pile is Set to Rise Again in 2021

Source: Bloomberg

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Over the past 14 years, global debt is double the previous toxic levels of debt.

Still, we hear no calls for the banning of plastic credit cards or calls to curb debit-emitting institutions, or for governments to control the spending on bureaucratic pollutants.

Not a peep. In fact, central banks and governments are doubling down on their efforts to pollute the financial system with more toxic debt.

For the past 40 years, global debt and CO2 emissions have been rising in tandem.

Which begs the question…

Is there a connection between the two moral challenges?

Short answer is…hell yeah.

The world’s largest emitter of CO2 is China.

As reported in Wikipedia, China’s economic reform (emphasis is mine):

began in 1978 and were carried out in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, most industry remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained.

Around the same time as China’s economic awakening began, US interest rates (the cost of borrowing) began their descent.

Perfect timing.

The following is an extract from an IMF working paper ‘Is China’s Export-Oriented Growth Sustainable?’, published in 2009 (emphasis added):

The global financial crisis has taken a toll on China’s rapid growth of the past three decades. Indeed, after an average growth rate of around 10 percent during 1980−2008, China’s GDP growth is expected to fall to 71⁄2 percent this year. This sharp slowdown reflects China’s dependence on exports, particularly to advanced economies—the culmination of years of reforms to open up and become more market oriented.

China’s phenomenal growth over the three decades — 1980s, 1990s, 2000s — was the result of a dependence on exports, particularly to advanced economies.

How did consumers (with stagnating wages) in those advanced economies afford to buy China’s exports?

By accessing a variety of debt offerings…credit cards; home equity withdrawals; in-store financing; payday lending; buy now, pay later.

It was a win-win situation.

China produced things cheaply…employing low-cost labour. And we got to buy more things at lower prices.

The mutually beneficial growth model between East and West drove global GDP higher.

But nothing ever happens in a vacuum.

The price tag for this artificially-created growth is going to be much higher than people are prepared for.

Success has sown the seeds of failure.

Tomorrow we look at the real challenge governments are going to face in the coming decades…and CO2 emissions will be the least of their worries.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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