Solving the credit crisis and the carbon crisis won’t be easy: Kohler

Unfortunately the world has been caught in a double bubble deflation – we have to deflate the carbon bubble at the same time as a deflating credit bubble is forced upon us.

Unfortunately the world has been caught in a double bubble deflation – we have to deflate the carbon bubble at the same time as a deflating credit bubble is forced upon us.

The good news, if it can be called that, is that the collapse of the credit bubble will do a lot of the work of reducing carbon emissions. As a sign of that, China yesterday reported a 9.6% fall in electricity production over the past year as its economy slips towards recession – carbon emissions there are collapsing without the Chinese Government doing a thing.

The world economy has expanded at a greater pace than it would have done naturally for about two decades because of the overuse of cheap carbon and cheap credit, leading to toxic bubbles in both.

Cheap oil and coal have underpinned massive expansions of global industry, including in China, and cheap debt has financed it, especially through the use of credit derivatives.

Both of these excesses must now be reversed together because, unhappily, carbon turns out to be toxic to the earth and threatens our children with a much less pleasant existence than we’ve been having, while the maintenance of a credit bubble requires confidence, which has now evaporated.

And no country has benefited more from the double bubbles of carbon and credit than Australia. Australia’s households are the world’s most indebted and Australian industry is the most reliant on cheap energy from coal-based power generation.

The effect of these twin deflations is largely a generational issue – it’s all about the extent to which the current generation borrows from the future to soften the impact now.

The Rudd Government is no different to any other group of politicians in the world – the people who matter to them are alive and voting today, so there is a great incentive to borrow from those not yet born, who will vote for some future bunch of politicians.

So the Government’s white paper lets the present generation off the hook. Households are to be overcompensated for loss and power generators that use coal will be allowed to keep doing it.

Next year’s Copenhagen conference on climate change will be held in the midst of a major global recession, and those attending it will be politically embattled, besieged by high, and probably still rising, unemployment.

They will be in no position to burden their citizens with onerous reductions in carbon emissions and expensive mandatory renewable energy targets. It will be left to the next generation.

In any case, carbon emissions will fall naturally because both electricity production and transport will decline.

The politicians who replace the current group in the recession elections that will take place over the next couple of years will be able to point to meaningful reductions in carbon emissions and take credit for them, while blaming their predecessors for the recession. Oh happy day.

As for the credit bubble – about $US500 billion worth of credit derivatives need to removed from the system.

This will require the financial system to marshal capital for several years, which in turn means cutting back on lending and imposing slower growth on the industrial system, which has had faster than normal growth financed by the credit derivatives bubble.

Yesterday the head of the IMF, Dominique Strauss-Kahn, said the downturn will last beyond 2010 unless governments take more fiscal policy action. He urged them to spend a combined 2% of GDP, or $US1.2 trillion, on boosting growth now.

“If we are not able to do that, then social unrest may happen in many places, including advanced economies,” he said.

Most of these countries’ budgets are already in deficit. More government spending now essentially involves borrowing more from the future to smooth things over in the present.

I’m not saying fiscal policy shouldn’t be used to keep down unemployment now, or that carbon reduction policies should be so tough that they fight against fiscal policies by increasing unemployment.

But my grandchildren will be paying the bill in a hot world.

At least there’s some comfort – you and I will be dead.

This article first appeared on Business Spectator