I am not sure what the climate change discussions in Bali are expected to achieve, besides imposing unnecessary hardships on Australians looking for cheap booze before the Christmas break. (I am usually inclined to accommodate such wishes with respect to the antipodeans, and their ejection of prime minister John Howard in recent elections has made them quite popular in Asia.)

If the intent of the conference was to reshape the global economy, then the assembled delegates have started completely the wrong way. Then again, these left-leaning do-gooders cannot be expected to get things right anyway.

Where I propose they start is in the halls of global central banks instead, for the biggest culprits of the global warming debate lie right there. To explain why I believe that is the case, readers can look at the following topics – consumption, negative goods and innovation. Once these are explained, it becomes easy to see what global central bankers should do.


By and large, the world economy thrives on consumption and especially the American kind. The US economy supplies one in five dollars of global consumption. This, added to the second dollar supplied by Europe, is what pushes global warming.

The US economy doesn’t produce as much as it consumes, hence its significant current account deficit. The other deficit, namely budget, is merely a function of Dick Cheney lying through his teeth (dentures?) about pretty much everything the government does.

Going back to the current account deficit though, it represents the ”dream” target of any Green. In actual carbon terms, the import of Asian products for example represents the carbon emissions of Asian countries as well as those of the global shipping industry. All told, various publications cite different figures but it would not be hazardous to assign some 30% of global emissions to the US current account deficit.

This is what the Greens miss completely – they count the emissions of China and India in the same league as those of the US and Europe, and that is wrong because a substantial portion of Asian emissions goes to the manufacture of goods consumed in the US.

In turn, what gets consumed in the US is also financed by Asia because Americans stopped saving from the time Carter stepped down. This is the billions of dollars in Asian central banks devoted to the purchase of US treasury bonds, as well as various ”highly rated” securities. I have written often enough about how much money will be lost in Asia because of these bonds, and there is no need to repeat my arguments here.

To a large extent, the twin forces of a disingenuous Fed (euphemism for outright liars) and harmony-seeking Asian central banks (euphemism for dumb no-gooders who wouldn’t get a job flipping burgers if their uncles hadn’t made them the governors of the People’s Bank of China or Bank of Japan or whatever) allow this circle of deficit-financed consumption to persist.

At the moment, with US consumer loans looking very risky indeed – this week for example reports showed sharply increased delinquency rates on auto loans in addition to the continued defaults on housing loans – Asian bankers are panicking about what to do with the billions of US securities on their books.

They have urged the US Fed to become more aggressive on interest rate cuts to help the US economy recover, in effect helping to perpetuate the cycle of global warming described above. In the face of rampant inflation, it makes sense for the US Fed to hike rates now and engineer a hard landing for the US economy. A few million Americans will be thrown out of work, but so what – they weren’t necessarily working on anything except selling each other inflated housing anyway.

A hard landing for the US economy will help cut global carbon emissions, by a factor of over 10%, so why not engineer it? This will also force Asian central banks to abandon their US dollar pegs (which is the main reason their incompetence can never be seen by the public) and actually try to manage inflation and growth in their own countries.

With a bulk of the world’s manufacturing now in Asia, a shift in consumption to the region would not be a bad thing, and anyway overall shipping emissions will decline because goods will be consumed closer to the point of manufacture.

Negative economic goods

The second aspect that the Greens miss out is the pricing of negative economic goods. The Greenspan Fed introduced some innovations in the calculation of inflation (and here I use the word innovation in the sense of lying) wherein the pricing of goods was adjusted for improvements in the product.

Thus, a medium-sized family car could well cost a couple of thousand dollars more than the last year’s model, but by incorporating metrics such as improved safety, higher engine capacity and bigger boot, the Fed could say that the price of the car actually fell for the year. This in turn meant that inflation was negative, which in turn allowed them to cut interest rates, boost consumption and all the stuff described above.

Think back though – if the world’s central banks can be urged to price negative economic goods into their calculation of inflation, they would have a completely different picture. In practice, the price of an average supermarket widget would have to be pushed up to highlight the effect of shipping it over from China, to the detriment of the global climate.

That alone can add some 10 percentage points to inflation calculations in the US and Europe, which should be sufficient to push these central banks from accommodative to restrictive in one step. The idea is hardly new as the US pioneered the pricing of negative economic goods with the tobacco industry. Just as smoking is bad for the lungs, driving cars and shipping dolls from China is bad for the environment. The reduction in living standards thus entailed should be reflected in the price of the product.


There is an old joke from the dot-com era, wherein the computer industry makes light of the automobile industry. The computer nerds point out that if cars had evolved as quickly as computers in the nineties, the average automobile would drive like a Rolls Royce, be priced like a Hyundai and have the fuel economy of an electric car. The joke of course was in the response from the car industry, which said – yes, all that is technically possible, but if cars performed like computers, you would need to change your models every time the road markers were repainted, among other quibbles.

Whichever way you lean on the joke above, ie, sympathetic to the computer nerds or the automobile engineers, the fact of the matter is that innovation in the car industry has been extremely slow by the standards of modern science. I have written previously about the economics of the car industry, with the main point being that the intervention in the automobile industries of Europe and Japan by local governments is one of the main factors limiting innovation in the industry.

There are other industries, such as carbon capture, where the right dose of pricing – see the argument on negative economic goods above – would help push innovation that is currently stalled. Promising new technologies such as fuel cell stacks for homes, wind power for large industries and electric cars on the road are all stalled due to the limits on the economics of innovation.

Much as the global pharmaceutical industry refuses to research drugs for diseases that do not affect Americans and Europeans, research and development of alternative energy technologies will not take off until underlying economics are addressed. This is the most significant force that humanity possesses to offset global emissions, and yet there has been little to no progress.

Pricing money correctly

The price of money, much like anything else, can induce behavioral shifts. The problem of global warming is linked closely to the excessive deficit-financed consumption of the US, but equally the thoughtless pricing of negative economic goods in the process.

Global central banks have the responsibility as well as the ability to make a difference. The major central banks such as the US Fed, European Central Bank, Bank of Japan and Bank of England should be urged to change their inflation calculations to incorporate the effect of environmental damage wrought by various activities. This will help countries to change the mix of domestic production and consumption, through the rather blunt instrument of interest rate changes. These banks would for example look to raise rather than cut interest rates now, if these adjustments were made.

That would necessarily push the world into recession, but it will be a short one as innovation takes over and new products and technologies that come to the forefront will help reduce the carbon footprint of global industry.

The second aspect is to ensure that unnecessary restrictions on the pricing of currency rates are removed. China’s peg is not just bad for the global environment; it also encourages other countries in Asia and Latin America to maintain currency intervention well past anything required realistically.

The last change that is required is for the Greens to stop assembling in various exotic locations. Available technologies such as video conferencing and internet blogging are more than sufficient to get their points across to various government officials. Plus it would leave the cheap booze for the Australians, as demanded by nature.