Gold is unlike any other commodity.  It is costly to extract from the earth and to refine to a reasonable degree of purity.  It is costly to store.  It has no remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses.  It may have some value as a consumer good – somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks.  I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus… .

The total stock of ‘above-ground’ gold is about 160,000 metric tonnes (a metric ton is 2,204 lbs. or 35,264 oz, for those of a non-decimal mind-set).  About 50 percent of this existing stock of above-ground gold is kept as a pure store of value (for investment purposes), most likely somewhere below-ground, for security reasons. The other 50 percent exists as jewellery.  I would argue that most of this jewellery demand is simply small-scale store of value (investment) demand by households, rather than demand driven by aesthetic considerations or other intrinsic sources of joy associated with having gold hanging from your extremities.

Until yesterday’s defeat of Roger Federer in the final of the US Open at Flushing Meadows, the most disappointing development this year was the performance of president Barack Obama and his administration – and my expectations were modest to begin with.

Saturday, August 1, my family will wing its way, DV, to Boston, MA.  From there we will trek on to Martha’s Vineyard to spend the month of August doing nothing in particular.  The combination of bad airport novels, adequate supplies of white wine (including, tell it not in Gath, vino verde) and the nearness of lots of family I don’t see enough of should enable me to recharge the nigh-depleted batteries.  Safe and sheltered in the company of other effete liberals and pointy-headed intellectuals, I hope to have the time to finally write the bad book (tentatively titled ‘Oi Oikonomiks!’) I have promised my agent. This blog will fall silent (not before time, I can hear you mutter) until September.

The only blight on the landscape of this holiday is that, once again, a US presidential family has decided to vacation on Martha’s Vineyard during the month of August.  From earlier visitations by the Clintons, I know that the arrival of the presidential hordes on the Vineyard represent a massive negative externality for all those who go there in pursuit of the same thing the president and his family seek: peace and quiet.  Whether the local economy gets a temporary or lasting boost, I leave as a project for Econ 101.

The presidential party (or presidential court) that tags along on any presidential journey, let alone a temporary relocation involving the entire presidential nuclear family, looks and behaves like an occupying army.  There are hundreds, if not thousands of persons charged with security, ranging from the secret service to the specially beefed-up state and local police forces.   Communications experts, specialist medical personnel, myriad advisers and countless other presidential hangers-on cause the Vineyard to sink at least a foot deeper into the sea.  The carbon footprint is bigger than that of the yeti.  The press corps and assorted other media camp out all over the island, competing with the presidential staff for first place in the hot air emission stakes.  Roads are blocked.  Traditional rights-of-way are suspended.  Beaches become inaccessible.

In the current worldwide debate about greenhouse gas emissions, the political leaders of the new big polluters (NBPs, especially China and India) attempt to shift the burden of reducing the global flow of new carbon-dioxide-equivalent (CO2E) emissions to the old big polluters (OBPs, mainly Europe, North America and Japan) by claiming the moral high ground, based on two arguments: (1) we are poor, you are rich, and (2) it’s our turn now to pollute.

I will, in what follows, take as given the proposition that (1) global warming is a reality; (2) global warming is a bad thing and (3) that human-made CO2E emissions are a significant contributor to global warming.  The science underlying these propositions is inevitably shaky – as has to be the case for any non-experimental science.  Still I believe that, even if I don’t really know whether my grandchildren are more likely to swim down Oxford Street or to ice-skate down Oxford street, the cost of not doing something about man-made CO2E emissions if they are indeed as harmful as the Greenhouse Lobby argues is vastly greater than the cost of unnecessarily restricting CO2E emissions – an application of the precautionary principle, if you want.

In my discussion of the Cap & Trade scheme for carbon dioxide equivalent (CO2E) emissions (greenhouse gases) proposed by U.S. Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass. (the American Clean Energy and Security (ACES) Act of 2009), I argue that the two key issues are (1) the size of the overall quota and (2) the enforcement of the rule that without a permit, you cannot emit.

Prima facie, the scheme looks tough.  The Discussion Draft Summary of the American Clean Energy and Security Act of 2009 reads: “The draft establishes a market-based program for reducing global warming pollution from electric utilities, oil companies, large industrial sources, and other covered entities that collectively are responsible for 85% of U.S. global warming emissions. Under this program, covered entities must have tradable federal permits, called “allowances,” for each ton of pollution emitted into the atmosphere. Entities that emit less than 25,000 tons per year of CO2 equivalent are not covered by this program. The program reduces the number of available allowances issued each year to ensure that aggregate emissions from the covered entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050.”

In fact, the scheme is a total con.  It permits the US to increase CO2E emissions until 2020.  The escape mechanism used – carbon offsets or carbon credits – suggests that for the period 2020 – 2050 also, the supposed intent of the Act – to reduce CO2E emissions in the US – will be neutered. 

How the business cycle is browning America

In politics, the urgent but not necessarily terribly important always trumps the important but not palpably urgent.  In the US today, getting out of the economic downturn is urgent, but not a matter of life and death.  Moving towards sustainable energy use and cutting back on man-made contributions to global warming is a matter of life and death, but not immediately so in the US.  When there is a conflict between a speedy exit from the recession and saving the environment, the environment therefore loses.

Since the crisis hit, it has been clear that the only pro-environment policies that have a chance, in the US and possibly elsewhere too, are those that involve increased public spending.  In this case environmental and Keynesian demand-boosting imperatives point in the same direction.  Examples are grants for home insulation, support for R&D and environmentally friendly infrastructure expenditure such as public transport improvements.  When environmental logic demands policy measures that increase costs to the private sector, however, the fact that such measures impose a financial burden on an already groaning private sector means that such measures will at best be watered down, at worst not implemented at all.

We have just seen two examples of this – the strange and deeply uninformed debate about a cap & trade scheme for CO2E emissions recently introduced in the House of Representatives, and the admission by the US Secretary of Energy, Dr. Steven Chu that bringing US fuel taxes (especially taxes on gasoline/petrol) is politically out of the question for the time being.

Am I the only one to think that tax incentives for new car purchases – cash for clunkers, in the words of Alan Blinder - are a daft idea? Even Obama has succumbed to this rot, despite an encouraging toughening of his general stance on government financial support for the US car industry (workers, shareholders and even unsecured creditors of GM and Chrysler have to take a larger haircut if more federal aid is to be forthcoming.  Now let’s apply the unsecured creditors part of this logic to the banking sector also!)

Fiscal incentives to induce automobile owners to trade in their jalopies and buy new cars have been introduced in many car producing countries, including Germany, France, Italy and Spain.  A number of US states and Canadian provinces also have introduced such schemes.  The rationale is partly a general Keynesian demand stimulus, partly a sector-specific subsidy to workers, managers, share holders and creditors in the automobile industry and other industries that depend on them.  If the programme is temporary and the cash incentive substantial, such programmes are bound to work.

This artificial shortening of the economic life of a car seems nuts.  It’s worse than getting paid to dig holes and fill them again.  It’s like being paid to burn down your house to encourage the residential construction industry. 

A monopoly is a bad thing.  It invites abuse of the power it controls.   Sometimes it is not the worst thing that could happen.  Anarchy or the ‘state of nature’, can be worse.   I don’t know whether Thomas Hobbes was right for all time and places in asserting that man is not by nature a social animal and that society could not exist except by the power of the state – the wielder of the monopoly of legitimate coercive power.

There may have been some bucolic, idyllic communities  that dispensed with the institution of the state, where the fundamental rights of people (life, health, liberty) and  property rights could be enforced effectively by individual action or through acts of spontaneous cooperation without external, third-party enforcement.  But once we get to communities exceeding a dozen or at most a gross of people, an institution endowed with the monopoly on the  legitimate use of force against its own citizens appears to have evolved, to have been created or to have been imposed everywhere.

The Pope ruined my Christmas.

What is it about the Judeo-Christian-Islamic religious tradition that leads so many of its most prominent spokespersons to make hateful, bigoted, life-diminishing and personal security-endangering statements when it comes to human sexuality? Perhaps there was something inherent in the environment and culture of the Fertile Crescent, and of the Middle East in general, that predisposed the religions it brought forth to declare anathema anything other than abstinence and heterosexual behaviour (the latter only in a setting of monogamy or polygyny, not polyandry, of course).  Even so, one would have hoped that the civilising influence of Greek and Hellenistic culture would have filtered most of the sexual bigotry out of the European religious mainstream, and out of its offshoots in the former European colonies.

Apparently not.  The current Pope, Benedict XVI is right at home in the abhorrent main-stream Christian tradition of sexual intolerance.  In his address Christmas greetings to the members of the Roman Curia and Prelature (December 22, 2008)’ (available thus far only in German and Italian from the Vatican website), the Pope makes a number of extremist, bigoted and intolerant statements about homosexuality and transsexuality.

My wife and I are the proud owners of all the common stock in a small company, created originally as a vehicle for supplying consultancy services.  Because we are both US citizens, the company is registered both in the US and in the UK. Over the years since its creation, an awareness has grown inside me, that what we really own is a bank: money goes out (quite a lot) and money comes in (not quite enough).  All we lack to be a proper bank is leverage and a marble atrium.

To remedy this obvious deficiency, I have decided to submit a request to the US banking regulators (cc’d to Hank Paulson) to grant bank holding company status to our enterprise.  If G-Mac can aspire to this status, which gives the qualifying institution access to all the Fed troughs and to what’t left of the TARP, then so can we.

Unlike G-Mac, which provides financing for crappy, environmentally unfriendly vehicles that no-one really wants, our would-be bank holding company is a model of family values at work.  Sure, we don’t make loans.  But show me a bank today that does.   You may wish to point out that the two principals involved have no experience running a bank.  You would be correct. But what really is worse, having no relevant experience or having an extensive track record of running multi-billion enterprises into the ground?  Make a choice between a definite risk and the certainty of abject and costly failure.

If we cannot get bank holding company status for our company, we will fly our (separate) private jets to Washington DC to appeal for congressional support for our business as a quintessential heartland enterprise.  The very fact that we are not systemically important makes us systemically important.  The reason is that if we can get money from the US government, anyone can.  And if anyone can, there is no longer any reason for fear, excessive caution and pessimism.  Consumers will spend again. Banks will lend again.  Companies will invest again.  Just give us the money.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website