1976 and all that

25. October 2022 · Write a comment · Categories: Economics

Three months ago, there was a lot of talk about 1976. My favourite tweet from the July heatwave was this one:

By contrast, 1976 seems to have disappeared from my Twitter feed altogether now, which is a shame because it was a time when a very different type of UK Government was trying to deal with some very familiar issues.

For instance:

  • Worries about the exchange rate. This is what effectively precipitated the International Monetary Fund (IMF) crisis, with the pound having fallen from the $1.77 level which the Bank of England had been defending with interest rates and reserve purchases ($400 million in September alone) between July and September 1976 to $1.63, with predictions of $1.50 being possible (although $1.63 turned out to be the low point).
  • Worries about the current account deficit, ie the fall of exports relative to imports. Import deposits, where importers needed to put up cash in advance, were being proposed as a possible measure, finally averted as part of the IMF deal.
  • Worries about deficits – cutting the Public Sector Borrowing Requirement or PSBR (what is now called the Public Sector Net Cash Requirement or, more commonly, just the budget deficit) by £1 billion pa was the UK Government’s negotiating position, although less than the IMF wanted.
  • Worries about fuel poverty – cabinet papers from Barbara Castle as the Secretary of State for Social Services in 1975 and 1976 focus on this a lot, with detailed discussion papers about the options for helping different sections of the population. This was also when the first winter fuel allowance was proposed.
  • Cost of living crisis – there were also cabinet papers concerning how to operate price restraint schemes in the wake of a white paper from 1975 called The Attack on Inflation, which involved agreements industry by industry on price increase limits with the CBI, the Retail Consortium and the unions, including specific limits for each of the nationalised industries.

According to Goodbye Great Britain, by Kathleen Burk and Alex Cairncross, published in 1992 about the 1976 IMF crisis, the IMF were partly being used by the US Treasury and other bodies connected with the US administration to force a change in UK economic policy in a way that they would not be able to do directly. There were concerns in the US that the UK would turn its back on the IMF, introduce foreign exchange controls, freeze convertibility, perhaps even default on its loans. Indeed Brent Scowcroft, the US President’s National Security Advisor at the time, said that:

I spent more time on this matter during those weeks than anything else. It was considered by us to be the greatest single threat to the Western world.

That was not the only reason for the IMF to negotiate hard. The 1968 Basle Arrangement on funding sterling balances following the sterling devaluation in 1967 was felt by many countries to have been unduly preferential to the UK compared to how other countries had been treated. The IMF itself was therefore also under scrutiny.

So this was the background to a crisis which seems to have been less about the money (the endorsement of the IMF for its economic policies was more important to the UK for calming the currency markets than the loan according to some accounts, whereas the Under-Secretary for Monetary Affairs at the US Treasury, Edwin Yeo, said that they had “put up the money [for the IMF loan] ‘for the bait’ – ie to hook the UK economy into IMF control when it had to be repaid.”) than about who ran the economy. Andrew Graham, a member of the Prime Minister’s (then Harold Wilson) Policy Unit in 1974 and 1975, remembered the fear of union strength amongst some during that period, with Labour people in Whitehall and Westminster asking each other which side of the barricades they would join – the miners’ or the army’s.

Certainly a year after the agreement the economic crisis seemed to be over. The pound was rising again (it eventually reached $2.40 by October 1980) and reserves increased rapidly. Denis Healey, the Chancellor of the Exchequer at the time, claimed that, if the forecasts he had received had been more accurate, the UK would never have had to go to the IMF, although I do wonder whether another reason would have been found given the concerns of the US Treasury in particular.

However the solution to the economic crisis created a political crisis. In March 1977, the loss of support amongst Labour backbenchers following the Public Expenditure White Paper of 1976 led to an agreement with the Liberal Party (the Lib-Lab Pact) to keep the Government in power and, according to Burk and Cairncross, “one incomes policy too many” led to the Winter of Discontent in the winter of 1978-9, when more than 2,000 workers went on strike in the Liverpool and Merseyside area – rubbish was left uncollected, hospital services were reduced, and bodies went unburied. This was what led to Margaret Thatcher’s election in 1979 and Conservative Government’s and Oppositions and their supporters have continued to refer to this ever since as the consequences of Labour economic policy, rather than the IMF crisis itself.

Yet it was the IMF crisis which seems to have been more formative for Labour. Jim Callaghan made a speech in September 1976, in the middle of the crisis, in which he said the following:

For too long, perhaps ever since the war, we postponed facing up to fundamental changes in our society and in our economy. That is what I mean when I say we have been living on borrowed time…We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

This statement seems to me to underpin every similar Labour Party statement since, from Liam Byrne’s “I’m afraid there is no money” to Keir Starmer’s recent promise that “there will be no magic money tree economics with us”. It is as if the Labour Party has never stopped trying to prove its credentials to some imaginary IMF mission ever since. The ghosts of 1976 remain with us.

Democratising the Lathe

21. October 2022 · Write a comment · Categories: Cartoons, Economics, Regulation, Science Fiction

I have been thinking a lot about Ursula K Le Guin’s The Lathe of Heaven over the last few weeks, a book I would highly recommend at any time but particularly at the moment. It is the story of a man, George Orr, who can change reality by dreaming. An ability that terrifies him. He is caught taking unprescribed drugs to try and prevent himself dreaming and as a result is sent for a “voluntary therapeutic treatment” with Dr William Haber, a dream specialist. Haber has built a machine called the Augmentor to make it easier for his patients to have dreams directed by him. He starts to work with Orr, becoming increasingly impatient with Orr’s version of the directions Haber is giving to his dreaming in the machine, until eventually Haber dispenses with Orr and connects himself to the machine instead.

Every time reality is changed it is as if it has always been changed. The changes become increasingly dramatic and disruptive until a peak of general insanity now referred to by all as The Break:

All over the world the various gods were being requested, more or less politely, for an explanation of what had occurred between 6.25 and 7.08 pm Pacific Standard Time.

But what the book really focuses on are George’s desperate attempts to live in this increasingly unhinged reality, as the only person (apart from Haber) aware of the abrupt changes swinging it around, and to hang onto the one person, Heather Lelache (or Andrews in the final version of reality they arrive at), he has ever loved.

One of the sentences on the last page (when he finds out that she has married) has stayed with me in particular:

He stood and endured reality.

However hilarious some of the moments of the last few days have been (and let us not forget some of the highlights here, here and here), we are all going to have to endure some significantly altered reality over the coming years as a result, from the moron risk premium to the cost of living crisis slowly rippling through all aspects of life, at a time when we already have a climate emergency and other planet-wide issues we need to be dealing with. There are many arguments to be had about the best way to tackle all of these problems, and I intend to throw myself fully into those arguments.

However, I would propose that we have to prioritise ensuring that, as a society, we never ever again let the lone mad scientist or economist or politician or former talk show host or indeed anyone else, whoever or however charismatic they are, take over sole control of the machine.

I think we need to do three things to achieve this, before we start to argue over policy:

Adopt proportional representation in parliamentary elections. We have got to broaden the support for whoever is in power, rather than stick with the current system which focuses on a tiny number of people in marginal constituencies and ignores pretty much everyone else. Make Votes Matter have agreed a cross-party document (which I have signed) called the Good Systems Agreement. This sets out the options on voting systems to replace first past the post and the best way of getting there. More about what is wrong with our current system (from the Electoral Reform Society) can be found here. Never again should there be a small cabal of people (like this weekend) deciding on who runs the country – with a steadily shrinking selectorate as their ability to achieve consensus on anything dwindles with every successive decision. We no longer have a system in the UK that can make important decisions and the answer is not more technocracy (leaving it to the so-called clever people, however foolish they may be) or plutocracy (leaving it to the rich), it is more democracy, ie including all of us in the decisions we will have to live with.

Reform media ownership and promote plurality in support of a more democratic and accountable media system. The Media Reform Coalition has produced a manifesto for a people’s media which I support: it includes proposals for an Independent Media Commons – with participatory newsrooms, community radio stations, digital innovators and cultural producers, supported by democratically-controlled public resources to tell the stories of all the UK’s communities. This will allow a much greater range of ideas to be presented to the public and discussed than the current Overton window (see below) and greatly improve our national debate about the things that matter.

Source: 99% Organisation

Reform election finance. Recommendations for doing this were provided in the July 2021 report by the Committee on Standards in Public Life, with 47 recommendations following a comparison of political and electoral finance regulation in 12 countries (Australia, Canada, Denmark, Finland, France, Germany, Ireland, the Netherlands, New Zealand, Norway, Sweden, and the USA), the majority of which are around reforms to campaign practices, meeting emerging threats around the source of donations, delivering greater transparency and enhancing compliance with election finance law.

We have big problems to solve in the UK and we need everyone to be able to contribute if we are going to solve them. However currently:

  • Our votes are counted in a way which effectively wastes most of them;
  • The information we receive about politics is fed to us through a very partial sieve controlled by a small unrepresentative group of people whose vested interests effectively define our Overton Window; and
  • Influence and access to power often appear to go to the highest bidder rather than the best ideas.

All of this needs to change whoever is Prime Minister in the coming weeks, months and years.

Chartered Actuary: I am still very confident that this is a good idea

07. September 2022 · 6 comments · Categories: Actuarial, Cartoons, Professions, Regulation, Risk

I originally talked about Chartered Actuary status (here, with the cartoon above) when the Institute and Faculty of Actuaries (IFoA) first proposed the idea and set up a consultation in 2018. I said then that sometimes an idea comes along that seems so obviously good that you wonder why it hasn’t been done a long time ago.

Four years on from the retreat from the proposal following the slenderest of straw polls offering some challenge, and it remains a good idea. There are still relatively few full actuarial roles available for associates and many firms still assuming a default career path of continuing to fellowship.

There are some differences this time however:

  • There will be two chartered actuary designations: Chartered Actuary (Fellow) and Chartered Actuary (Associate), with the hope that the FIAs who were most concerned with maintaining their distance from AIAs last time will now support the proposal. The original proposal suggested Chartered Actuary (CAct) would be a single distinct qualification, a required qualification point for all student actuaries to reach before going any further and globally recognised as the generalist actuarial qualification from the IFoA. This approach has been abandoned, with no requirement to complete the core curriculum before tackling specialist modules. It will be interesting to see whether Chartered Actuary (Associate) will be seen as a destination in its own right, or just a change of letters. This will depend on all of us within the profession (see below).
  • The environment we are operating in has certainly changed, with the replacement of our regulator, the FRC, by the Audit, Reporting and Governance Authority (ARGA). One of the concerns that the IFoA were looking to address in 2018 was that another, much larger, profession, could pose an existential threat. If actuaries have a unique skill set, which is likely to be lost to a wide range of businesses and other sectors if it is unable to meet the demand for those skills due to a simple lack of numbers, then the need to take any perceived barrier to practise away from our emerging young professionals is clear. The move from FRC to ARGA does not remove this threat and there also remains in the regulatory proposals to date the threat of differential regulation, where actuaries are regulated more heavily than other professionals doing similar work could price us out of markets where we have value to add. The profession therefore needs to grow to increase our voice and influence over the future regulation of the profession.
  • We have acknowledged the impact of the Great Risk Transfer within the finance sector, but in my view the impacts more generally of the increased individual risks and uncertainties millions of the UK population face as energy, food and housing costs escalate need to be faced up to by our profession. For that we need to continue to be a destination of choice for a growing number of your people with a widening range of backgrounds and experiences.

So what do we need to do to make this a change worth making? We need to start behaving like a generalist actuarial qualification is what we want, and offering roles for actuaries on completion of core practice modules in future. It will mean not necessarily insisting on further actuarial specialisation as a requirement for senior roles within our firms. It will mean getting comfortable with a much wider range of specialisms amongst those we consider to be actuaries. Some are already doing this, but most of us need to go much further. A good place to start might be the IFoA’s own website, where the Route to Becoming An Actuary still features a diagram where an IFoA Associate is shown as a milestone on the way to the final destination of becoming a Fellow.

Do cuttlefish dream of the passive electroreception of sharks?

02. September 2022 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics
“Tom-and-Jerry-tom-and-jerry-81353_800_600” by momokacma is licensed under CC BY 2.0.

We do it all the time. We assume that the animals around us experience the world as we do, with our obsession with the visual sense. We are used to anthropomorphising animals in our cartoons, but it goes much further than that: for instance if, like a dog, your sensory world or Umwelt is primarily based on smell rather than sight, then that daily walk you take with your dog has very different highlights and notable features (amazingly the slits on the side of a dog’s nostrils allow it to smell on out-breaths as well as in-breaths). We have sayings based on these anthropomorphisms: for example, the “unconcerned” frog in the water as it is heated to boiling (cited by Emily Maitlis in her recent speech in Edinburgh) may not be unconcerned at all, merely showing its distress by filling the air with smells like peanut butter, cashew nuts or curry rather than via the reactions we would expect from a human.

Our vision is not even all that extraordinary compared to some other animals. Mantis shrimps have more classes of photoreceptors covering the ultraviolet spectrum than we have in total. They are the only animals who can detect circular polarization, where the plane in which the light is polarized also rotates. However they are much worse than us at telling our visual range of colours apart and may not even have a conception of colour as we know it at all. We don’t know.

We are not even sure how many senses there are. Aristotle said there were five (sight, hearing, smell, taste and touch), but missed our senses of proprioception (ie awareness of your own body) and equilibrioception (ie sense of balance). There are also animals who have a secondary system for detecting odours, or who detect the body heat of their prey via their brain’s visual centre or have sensors which both detect electric fields and pressure. How should we categorise these and does a clear division between senses make any sense? We don’t know.

Elephants can hear each other several miles apart just after sunset, but we don’t know what they are listening for. Beaked whales have a range of crests, ridges and bumps on their skulls which are not outwardly visible other than via the echolocation they use, but we don’t know why.

And finally, for now, the cuttlefish of the title. When cuttlefish sense sharks, who have passive electroreception (ie the ability to detect electric fields in other animals), they stop moving, hold their breath and cover their gill cavities to reduce the voltage of their electric fields by up to 90%. I could go on, but all of this and so much more is contained in Ed Yong’s masterful An Immense World, which I could not recommend more highly, not only for the content but also for the wonderful joyful writing throughout (AC/DC’s Rock and Roll Ain’t Noise Pollution even gets a mention!).

The recurring theme for me is how much we still don’t know about all of these animals, and the amazing new discoveries which are being made every year. Every animal perceives a different world from the one we think we are living in, many of these perceptions currently (and in some cases perhaps permanently) impossible for us to understand. It takes an extraordinary level of anthropomorphic arrogance for us to convert all of those strange and wonderful lives into the concept of natural capital.

The Institute and Faculty of Actuaries’ Biodiversity and Natural Capital Working Party defined natural capital in their paper from April 2021 (which acknowledges the concerns I am raising here and those raised by others) as follows:

The concept of ‘natural capital’ therefore aims to recognise nature as an asset and aims to ensure that
the goods and services offered by nature become a part of decision making by governments,
businesses, and individuals regarding resource allocation, growth and development.

The Dasgupta Review has gone further, focusing on the economics of diversity. As it acknowledges:

The Review has developed the economics of biodiversity by viewing Nature in anthropocentric
terms. That is an altogether narrow viewpoint, but it has a justification. If, as we have shown in
Part I, Nature should be protected and promoted even when valued solely for its uses to us, we
would have even stronger reasons to protect and promote it if we were to acknowledge that it
has intrinsic value.

I strongly disagree. As George Monbiot pointed out several years ago, markets change the meaning of the things we discuss, replacing moral obligations with commercial relationships. The latest article in The Actuary magazine on natural capital discusses ecosystem collapse in its final paragraph in terms of how it would “negatively impact GDP” and “economic value”.

Once the diversity of nature can be reduced to a monetary amount or metric value, it can obviously be modelled much more easily but, as we have seen again and again within the finance sector and elsewhere, that is at the expense of consideration of any other aspect of our relationship with it.

Perhaps cuttlefish do dream of the passive electroreception of sharks. If they only knew what we were up to, they might instead have nightmares about their balance sheet entries in our spreadsheets.

Terraforming in reverse

23. August 2022 · Write a comment · Categories: Climate Change, Science Fiction
Side by side images en:User:Ittiz created to show what Mars might look like at various stages while being terraformed in vertical alignment. The horizontal alignment is here: en:Image:MarsTransition.jpg http://commons.wikimedia.org/w/index.php?title=Image:MarsTransitionV.jpg&oldid=11571800. This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

Terraforming was a concept I first remember coming across in Star Trek 2: The Wrath of Khan in 1982 when “The Genesis Device”, and its effect on a dead planet, was described as “matter is reorganised with life-generating results”. The astronomer Carl Sagan had previously proposed the planetary engineering of Venus in 1961 and Mars in 1973. Martyn J. Fogg subsequently started publishing articles on terraforming in 1985 before publishing Terraforming: Engineering Planetary Environments in 1995. Fogg defined planetary engineering as using technology to change the global properties of a planet (he called this geoengineering if Earth was the planet in question). Terraforming he defined as planetary engineering which was specifically directed at enhancing the capacity of a planet to support life as we know it.

There are still advocates of terraforming as a project that humans should be actively working towards. Others suggest, that unless Earth is going to be unavoidably uninhabitable, it is likely to be our best bet as a future home for all but a relatively tiny number (Kim Stanley Robinson’s novel Aurora is the most memorable advocate for this position in my view, which takes us on a gruelling exploration of a terraforming expedition over several generations which then allows us to view Earth afresh with alien eyes).

What is clear is that we are not currently terraforming Earth in Fogg’s sense, as most of our planetary engineering (what we call the global economy) appears to be specifically directed at reducing the capacity of Earth to support life as we know it. We are terraforming in reverse.

Terraforming is an example of an idea you might get to as a result of very long-term thinking (there is a nice article about this in Vox, with views from Roman Kznaric, Nick Beckstead, Hilary Greaves and William MacAskill included) – I tend towards the Kznaric view that we cannot predict the knock-on effects of technological shifts in 200 or 300 years, but we know we’ll still need to breathe air and drink water, so working to prevent climate change and pandemics is very likely to be really good for us today, the near future and the long-run future too.

The danger of discussion of the very long-term is that it can create the idea that nothing we do over the next few years matters. However as we have pushed up to and beyond planetary capacity in so many areas now and have developed a global economy with planetary engineering capabilities of unprecedented power, this is no longer true if it ever was. What seems obvious to me is that we mustn’t make decisions now which lock in damage to planetary life-supporting capacity for generations to come, such as the “carbon bombs” described by George Monbiot here.

Terraforming in reverse is not the direction to choose, whichever generation we belong to.

Black ball

18. August 2022 · Write a comment · Categories: Cartoons, Climate Change
Cartoon of a black ball powering the planet

Imagine all of the fossil fuel energy available to the Earth and its inhabitants before our emissions from using that energy mean that we will have, on average, a climate 1.5oC warmer than pre-industrial levels. Imagine it as a big black ball located, for convenience, in China, as we have exported many of the most carbon-intensive manufacturing processes we all need there, and that we are all sucking the energy we need from this black ball 24/7 until it is exhausted.

We are currently at 1.2oC above pre-industrial levels on average and have seen the consequences this summer in the UK, and in the unprecedented number and size of wildfires still raging across Spain and Portugal in particular, to name a few of the events which have been made much more likely by climate breakdown.

The last estimate of the size of the ball came from the IPCC AR6 Report of 2021, which indicated that the remaining carbon budget to remain with a 50% chance of staying at or below 1.5°C of global warming is 580 billion tonnes CO2 and about 420 billion tonnes CO2 for a two-thirds chance of limiting warming to 1.5°C, all as at 2018. Annual global CO2 emissions in 2019 were 36.7 billion tonnes, in 2020 they were 34.8 billion tonnes and in 2021 they rebounded to 36.4 billion tonnes. So that ball is shrinking very fast.

Why the obsession with 1.5°C? Well, it is what we and most other countries signed up to in Paris in 2015. 2°C was agreed to be a much worse outcome than 1.5°C – we can already see the results of current warming where 20% of the global population lives with 1.5°C warming in at least one season of the year, but a global average of 2°C compared to 1.5°C would increase the proportion of the population exposed to severe heatwaves at least once every 5 years from 14% to 37%. NASA have an article on this here.

Can we make the ball bigger, by removing some of the carbon dioxide? If you look at the pathways that the IPCC discuss, you will see that they are split between those where temperatures are stabilised at or below 1.5°C warming and those which go above but are then brought back down later in the century. In its most recent report published in April, the IPCC said the use of CO2 removal is now “unavoidable”, if the world is to reach net-zero greenhouse gas emissions. Where the UK is in its programme of carbon removal is discussed here. However, to get it into perspective, global carbon removal to date is still in the experimental stage, and there are many problems remaining to be overcome with most of the proposed methods, so such efforts must be additional rather than in anyway an alternative to drastically cutting our emissions.

Back to the ball. If this represented all of the remaining water in the world (the scientific consensus at 3°C warming has Indian monsoon rains failing, the Himalayan glaciers supplying the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers decreasing by up to 90% and the Amazonian rain forest basin drying out completely), would you think about it differently? Would you continue washing your car every weekend, watering your lawn, and power-washing your drives and patios on the assumption that we would invent a new way of making water? Simon Brodkin has done a good bit in answer to this, which is both very funny and terrifyingly plausible.

Some Don’t Like It Hot

21. July 2022 · Write a comment · Categories: Climate Change, Regulation
Levels of body temperatures at which extreme hot and cold sensors are triggered – data source: An Immense World – Ed Yong

In January this year, the southern hemisphere experienced, in some cases, record-breaking heatwaves, with temperatures reaching 50.7° C in Western Australia. In the last few weeks, it has been the turn of the northern hemisphere.

In the UK this week, we recorded the highest day (40.3° C in Coningsby in Lincolnshire) and night (25.8° C in Kenley in Surrey) temperatures ever. What is clear is that climate change has already significantly changed the probabilities of extreme weather events occurring in the UK, meaning that our own past experiences of weather ranges and likelihoods are now out of date.

This is likely to have many consequences. This week our railways literally went into meltdown in places, with New Street operating an “exit only” policy for a period while no trains were running to or from the station at all. Overhead cables were damaged, requiring lengthy repair work and buckling rails led to widespread speed restrictions across the network. This is because the heat tolerances of our railway system were set in cooler times, meaning that most of the network can operate up to around 46° C. As track temperatures can be up to 20° hotter than air temperatures, this threshold was widely exceeded.

So, if our infrastructure has limits, what about life on the planet? Well yes, in animals these are controlled by proteins called TRP channels, which allow neurons to be stimulated at temperatures which would be immediately extremely harmful to the organisms concerned. A few of these are shown above. In humans, this is a body temperature of around 42° C (a healthy temperature is around 37° C and our bodies work hard to keep it there, but we starts to feel unwell from 37.8° C upwards and may become comatose at 42° C. We are likely to die or at least suffer serious brain damage at 43° C), but the hot and cold limits vary hugely between different species. So rapid changes in the temperature distributions means that habitable areas, which would need to be at temperatures well short of these limits, for a wide range of animals and plants will also be changing rapidly, requiring migration or extinction for many.

In humans, where we have more control over our environments, we will still need to adapt many of our practices, from how we construct our infrastructure, to how we use resources and spend our time. One obvious question that has come up this week is why we don’t have a maximum workplace temperature (currently we don’t have a minimum either, although we do have guidance around minimum temperatures). The House of Commons Library Briefing Note on this from 2010 can be found here.

In Germany, a maximum of 26°C is the norm but the guidelines state that, if the outside temperature is higher, a workplace temperature may in certain circumstances be higher than 26°C.

In Spain, Real Decreto 486 of 1997 lays down that, in places where sedentary work takes place, the temperature should be between 17 and 27°C. In places of light physical work, an acceptable temperature will be between 14 and 25°C, although there are some limitations and conditions around these requirements.

There are clearly complications around setting a maximum comfort level which would probably also need to account for humidity and activity, but the Health and Safety Executive have suggested 30° C in their guidance as a maximum acceptable temperature, less if the work is strenuous. They also suggest polling employees to see if a particular temperature is comfortable, making adjustments if more than 10% are uncomfortable in an air-conditioned office.

There are now renewed calls to introduce a maximum workplace temperature in law. And, as Lord Turner so eloquently put it on Sky News, this is at only 1.2°C warming. If all of the promises made at Glasgow are kept we may stay between 1.8°C and 2.5°C. However in the UK, the Climate Change Committee, the body set up specifically to monitor our compliance with our climate commitments, has already said that our current programmes will not deliver net zero. And Liz Truss, who may be Prime Minister in 6 weeks, has vowed to halt the only green levies we have so far been able to put into law.

In the meantime, it appears to be a great time to be a Melanophila, or fire-chasing, beetle.

Ant Music

12. July 2022 · Write a comment · Categories: Cartoons, Economics
But how do they know where they’re going? Spikes! Stop eating them!

I am currently reading a wonderful book – An Immense World by Ed Yong – which I am certain will feature in much of my writing over the next few months. Today I want to talk about what Ed’s book has to say about ants and, in particular, ant pheromones.

Pheromones override all of an ant’s other senses. An ant will walk itself to death if its pheromone trails are laid in a circle (“the army ant death spiral”). And if an ant happens to get covered with one of the pheromones that signal that it is dead, it will continue to be treated as if it is dead however much it protests.

Compared to ants, the current Conservative Party leadership candidates obviously bestride the world like colossi, but I think I have spotted a similarity in the contest so far. Public First have attempted to put all of the policy announcements by each of the candidates together on a single spreadsheet and what is noticeable is that there is only one row which has an entry for every candidate: tax and economic growth. More popular than immigration, Brexit & Europe or any of the other issues one would expect any Conservative leader to have an immediate policy on. And, with one exception (the architect of the current economic policy which has been going in a different direction, Rishi Sunak), they all seem to be proposing a variation on generating economic growth as a result of tax cuts. I will not comment further on whether this is a coherent policy, as that has been done very well here.

However it did occur to me that tax cuts might be doing the same job for Prime Ministerial hopefuls as pheromones do for ants, ie something which, once emitted, makes everything else about your policy positions irrelevant. The problem of course is, whereas the success of an ant colony depends very largely on the coordination of a huge number of individual insects to follow a path, recognise an individual (or more likely a member of a group), identify their own young, etc, the leadership race is supposed to be giving the candidates a chance to differentiate themselves from each other. Even allowing for the fact that many in the race have no expectations of making the last two, but are merely indicating their level of ambition in a way designed to be noticed by one of the two who do, it does seem as if they have already coalesced into two teams – Ready For Rishi and Not Remotely Ready For Rishi. And noone running appears to be obviously looking for a job from Rishi Sunak.

The dangers of making policy a reflex rather than a reflective activity, particularly with respect to the economy, are obvious. Because the pheromones act on all of the ants, including those emitting them, this doesn’t suggest an eventual winner who is likely to be able to change economic direction beyond usual Conservative Party instincts, whatever is actually going on in the economy. Ed Yong has already used the army ant death spiral as a metaphor for the United States’ response to the pandemic.

It should all become a lot clearer tonight when the ones who cannot get 20 MPs to support them will drop out. It would be great if one of them would make a break with Elgar and use Ant Music as their campaign song instead. Then we would all know where we stood.

What Stuart Kirk was not criticised for and what this tells us about financial markets

01. July 2022 · Write a comment · Categories: Climate Change, Economics, Regulation, Risk, Science Fiction

For those of you totally immersed in the daily to and fro of the finance industry, this post about Stuart Kirk will probably seem a little late in the day. For those of you who are not, let me explain briefly what I am talking about today!

Stuart Kirk was Global Head of Responsible Investments at HSBC Asset Management. On 19 May 2022 he gave a talk at the FT Live Moral Money Summit Europe conference with the provocative title of Why investors need not worry about climate risk. Stuart’s talk was a real crowd splitter. Many called for his dismissal (HSBC subsequently suspended him), others regarded his talk as a missed opportunity and full of things which were not true, while others have regarded his stance as speaking truth to power.

However what interests me most about all of the column inches devoted to the affair is what he has not been criticised for and what this tells us about financial markets.

What Stuart said was structured around the following 12 statements:

  1. Unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong.
  2. As the warnings became ever graver, the more asset prices INCREASED in value.
  3. One of only three explanations can explain the impending end of the world and higher risk asset prices:
    1. Climate risk is negligible.
    2. Climate risk is already in the price.
    3. All investors are wrong.
  4. Even by the UN IPCC own numbers, climate change will have a negligible effect on the world economy – A (large) temperature rise of 3.6 degrees by 2100 means a loss of 2.6 per cent o global GDP. Let’s assume 5%.
  5. Adaption is cheap and effective: climate related costs relative to GDP and mortality rates are down.
  6. Perhaps the biggest error of thinking with climate risk is confusing volumes and values – Plenty of things happen between a volume disruption and a move in asset values.
  7. Climate “winners” and losers” can create value. Climate “winners” and “losers” can destroy value.
  8. The difference between volumes and value is regularly made clear in markets.
  9. Even if climate risk isn’t negligible, it’s too far into the future to matter for most companies.
  10. To make climate change appear like a significant threat, scaremongers are torturing their models.
  11. It’s easy to show that climate change is an investment risk if you engineer a bond market collapse.
  12. Climate change isn’t a long-run risk just like wars, energy crises, pandemics, financial crises and so on (with the graphs shown above to supposedly prove this point).

Can you spot the pattern here? All of these statements are about the map that Stuart is standing in (think of Joey standing in his map to orientate himself in Friends). It is a complicated map of asset prices and charts and reports written by lots of other people standing in the map with Stuart, but it is still just a map. And the map is the territory as far as Stuart is concerned. If something does not appear in his map, it is not worth worrying about. And climate risk is struggling to make it into his map. In Stuart’s view, this is a problem for climate risk, and the people “torturing” their models to make climate risk appear significant and piling him up with regulatory reporting responsibilities are very annoying.

But of course this take is completely upside down. This is not a problem for climate risk. Rather climate risk is a problem for us and the fact that it does not appear in our models unless we torture them (which I am sure is true) means that we have the wrong models. Because the scientific consensus about the consequences of climate change on our current trajectory of between 3 and 4 degrees warming are (amongst others from Mark Lynas’ Six Degrees: Our Future on a Hotter Planet):

Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation.
Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%.
The Amazonian rain forest basin will dry out completely. In Brazil, Venezuela, Columbia, East Peru and Bolivia life will become increasingly difficult due to wild fires which will cause intense air pollution and searing heat. The smoke will blot out the sun. Drought will be permanent in the sub-tropics and Central America.
Australia will become the world’s driest nation.
In the US Gulf of Mexico high sea temperatures will drive 180+ mph winds. Houston will be vulnerable to flooding by 2045. Galveston will be inundated. Many plant species will become extinct as they will be unable to adapt to such a sudden change in climate.
The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one].

Much of the discussion about the talk was that Stuart was speaking out bravely and that HSBC had only suspended him to silence inconvenient truths, that he had been silenced by “extreme environmental ideology“. I have no idea about all of the reasons why HSBC suspended Stuart other than their official statements, but it seems clear to me that many people in the finance industry agree with what he said. This suggests to me an extreme ideology of its own of resolutely refusing to look out of the window.

In Kim Stanley Robinson’s excellent New York 2140, global sea levels have risen by 50 feet. Everyone lives in tower blocks connected by sky bridges which occasionally topple into the canals which were once streets. I used to think that money markets would not survive events like this, but Robinson posits what I believe is a more likely future scenario. The Intertidal Property Pricing Index is developed instead, carefully constructed to be reasonably stable despite the instability of the actual real estate being valued, and people bet on it. And soon everyone is fixated on what this index is saying daily rather than the buildings collapsing around them.

This is exactly what our finance sector will do of course, there will be money to be made out of such activities after all. And so expectations that they will, in any way, be a leader out of the climate emergency are, in my view, unrealistic.

We will however need the finance industry to facilitate aspects of how we transform our economies over the next 10 to 20 years. And this will involve much more of the regulation which annoys Stuart and others so much.

Fighting for meaning

24. July 2021 · Write a comment · Categories: Cartoons, Professions

I recently finished reading an excellent book about how to read Russian short stories: A Swim in a Pond in the Rain by George Saunders. Of course it is about much more than this, drawing on George’s 20 years of experiences of teaching a creative writing course at Syracuse University and his own writing experience (primarily a short story writer, he won the Booker Prize for his first novel in 2017: Lincoln in the Bardo. It has caused me to think more deeply about my teaching (I teach some mathematics, economics, professional skills and communication skills) as a result. The two pages where George talks about finding his literary “voice” are, for me, worth the price of the book on their own – I never really understood how critical this was and why noone I had read had talked about it in very clear terms before. I can also, at long last, see the point of literary criticism. This book is all about the fight for meaning, and a bare-knuckled fight it is at times.

I think finding your own voice can apply in any field, not just the creative ones. George describes realising that he did not belong on Hemingway Mountain and the process of finally accepting his own “Shit Hill” with huge power. But at least as a writer you know you are supposed to be finding your own distinct way of writing. I sometimes think that, in many professional careers, this is not widely encouraged.

However it is, in my view, massively important. Finding your voice in a professional career is about discovering what you are good at and what you are interested in and trying to bridge the gap between the two. It is about being prepared to learn from those around you, although not necessarily the thing they think they are trying to teach you. It is about being prepared to spend time, sometime considerable time, on mastering things which are important to you, even if they seem to have no importance to anyone else. In this way you will develop an independent professional career where you have something interesting to say in your chosen field.

This may sound very utopian to some, particularly those in the early years of a career where you may have little control over your workload or the structure of your working day. However that will not be the case for ever unless you choose it to be and, provided you do not lose the habits for finding your own voice in the meantime, the opportunities to do so will only grow.

What you may have gathered from this is that I see finding your voice, not as some quick process that takes place over a short period at the start of your career (at least not in the pursuits I have been involved in so far), but as a lifetime’s search. Mine didn’t really start until I was 40 and, health willing, will carry on for many years to come (I still have no real idea what my voice as a writer is yet).

Let’s all wish each other good luck on the quest!

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