2009 May 28 » New Jersey CFO

Recently I had occasion to watch an online debate between a clean-coal advocate and a robust, articulate green-energy blogger. The debate followed predictable contours. In one corner, the clean-coal advocate repeated a series of rather inflated achievements, supposedly gained over the past 30 years in coal-fired power generation. In the other corner, the green-energy blogger appropriately deflated these claims, but then went on to paint pictures of shiny happy people living in a peaceful and clean world. A world portrayed, it should be added, as easily attainable. I patiently read through to the final jousts, and then sat back in my chair to watch oil make its climb above 60.00.

The dialectic of the environmental debate, over coal, has now formed a well-worn path. It’s largely political at this stage and the core thrust of the conversation, just as in oil, is that everything could be solved if only the opposition would get out of the way. While it’s not the focus of today’s post I’ll briefly remark that the type of fast transition to a clean power Grid, often talked about by famous advocates like Al Gore, is simply not possible. Not in a 10 year time frame. Not even close. Equally, I would note that coal remains a serious environmental problem even after 35 years of regulatory improvements. And, I see that the coal industry repeatedly takes total aggregate gains in air quality nationally over the past 35 years and then claims those entirely for itself. C’mon. Also, marking those gains starting from the worst levels in 1970 obviously makes for a dramatic comparison. The Clean Air Act did the heavy lifting here.

The bigger problem with this debate, especially as it occurs in the United States, is that it constantly pivots off the notion that we have lots of freedom and discretion to decide how both we–and especially the rest of the world–will use coal. Sure, we’ve got some choices here. But as I have written previously coal is a nemesis precisely because it’s a cheap source of BTU that continually prices just below other fossil fuels. And sometimes, it prices well below other fossil fuels. Such a pricing is forming now, as oil climbs back above 60.00, while Central Appalachian Coal (CAPP) still lingers in the mid 40’s per ton. The 5.8 million BTU in a barrel of oil will set you back 60 bucks. Yes it’s liquid. And yes, it’s a very useful form of energy. But the fact remains that the world’s poor, a full quarter of humanity, is still in the process of migration to liquid fuels. And coal, with its versatility in both heating and industry, is still the fossil fuel of choice for the developing world. For 45 bucks, you can get yourself as much as 25 million BTU in a ton of coal. That’s a 25% price discount to oil, for more than 4 times the BTU. That is some serious BTU bang for your buck.

Unless the US-based VOIP-Web-Cam Political-Journal Blogging-Heads type debate wishes to move on now, to whether US coal reserves should be locked into the ground and neither used by us, nor exported, then the bulk of this conversation is frankly rather academic, and leisurely. Furthermore, oil above 40 as early as 2004–let alone oil above 60 today–was more than enough of an energy price-shift to kick global coal demand into a much higher gear. And not solely in the developing world either. The data clearly shows the total global call on Coal this decade, as a kind of panicked flight from expensive oil, was enormous. For these reasons, favorable coal conditions are now moving in because oil is lifting in part from dollar weakness and reflationary policy at a time when industrialism remains weak. These are exactly the kind of difficult, almost fetid, economic conditions in which coal thrives. Coal likes a swampy, stagflationary landscape. One where growth has trouble getting off the floor, but where the world’s 6.7 billion people still need heating and basic power generation. Not exactly a happy story, is it?

–Gregor

Photographs: Mike Brodie, aka The Polaroid Kidd. see Needles and Pens Gallery, San Francisco California.

Further Reading: Why was the Industrial Revolution British? (discussion of Wood and Coal) H/T Freude Bud.

Coal is here to stay for awhile, whether we like it or not. (Gregor.us)

Onetime presidential hopeful and current Republican congressman Ron Paul has an interesting piece of legislation wending its way through the US capitol. HR1206 calls for “a complete audit of the Federal Reserve and removes any significant barriers towards transparency in our monetary system” says Paul’s website.

This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats. Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well. I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.

Congressman Paul continues:

Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters.

And indeed, continues:

Instead, Congress has abdicated this responsibility to a cabal of elite, quasi-governmental banks who, instead of stabilizing the economy, have destabilized it. It took less than two decades for the Federal Reserve to bring on the Great Depression of the 1930’s. It has also inflated away the value of our currency by over 96 percent since its inception. It has invisibly stolen from the poor and given to the rich through this controlled inflation, and now openly stolen through recent bank bailouts. It has predictably exacerbated the very problems it was meant to solve.

All of which we’d have been quite likely to dismiss out of hand, were it not for its relevence in light of an excellent essay from historian Simon Schama in last weekend’s FT, on the central-bank hating tendencies of President Jackson, and more broadly, the long and rich seam of bankphobia than cleaves through American history:

Jackson, who was in the White House from 1829-1837, was a new brand of politician in American life. No one would confuse him with the Virginian gentlemen-planters who had dominated high office in the early republic. He had been Indian fighter, scourge of the British and darling of the frontier crowds. But what really got his dander up was the Bank of the United States, the institution granted the monopoly to print paper money. The “Monster”, he declared at the height of his presidential knock-down battle with its president Nicholas Biddle, “wants to kill me but I will kill it”.

And destroy the Bank of the United States Jackson did, vetoing the Senate’s renewal of its charter in 1832 and running for re-election as the champion of People v Monster. The result of the liquidation of monetary regulation was predictable: wildcat speculation. Two months after Jackson left office in March 1837, the second of the great American financial meltdowns was under way (the first was in 1819). Another swiftly followed in 1839 under the administration of Jackson’s hand-picked successor, Martin Van Buren. On the eve of the civil war, Jackson’s wish for monetary decentralisation had come true beyond his wildest dreams There were 7,000 local currencies circulating in the republic and an epidemic of counterfeiting. It took Lincoln’s Banking Act of 1862, born of a desperate need for dependable credit to fight the war, for a modicum of monetary order to be salvaged from what Biddle had accurately prophesied would be monetary anarchy.

Jackson tapped into a pulsing vein of American insecurity about the moral character of money.

In fact, in the unstable conditions of America in the 1830s, the paper of the Bank of the United States was by far the most dependable medium of transactions from Maine to Louisiana. But Jackson was convinced that unless the Bank perished, American democracy would always be infected by its machinations. What was at stake was the battle of rural and urban values for the economic soul of America. In some ways this was almost as momentous as the struggle between the slave south and the free north for it went to the heart of what America was supposed to be: a place where simplicity and transparency ruled in small moral communities, or a self-energising machine of unlimited economic growth and power: Field of Dreams or Citizen Kane?

Interesting times we live in.

America has a long tradition of central bank antagonism. (FT Alphaville)

Keith Bradsher’s New York Times story on the recent evolution of China’s foreign portfolio gets — at least in my view — the story right. Of course, that may be because I was — rather obviously — a source for the story. Check out the charts that accompany the article!

The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.

China’s purchases of Treasuries (especially short-term bills) have gone up even as China’s reserve growth has slowed, as China shifted money out of Agencies and — in all probability — out of money market funds that are taking credit risk and other privately managed accounts. The failure of Reserve Primary had a big impact on China. Bradsher:

“Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars. This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. ….

China was the world’s biggest buyer of [securities issued by government-sponsored enterprises] a year ago, splashing out more than $10 billion a month. But in the 12 months through March, it actually had net sales of $7 billion, and ramped up purchases of Treasuries instead. China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds, seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive.

At the same time, China has sought to ramp up its exposure to commodities. China’s government clearly is adding to its strategic stockpiles — and perhaps encouraging state firms to build up inventory as well. China’s government is encouraging Chinese state firms to invest more abroad, especially in the mining sector. And China’s government is providing financing to cash-strapped commodity exporters (Russia, Kazakhstan, Brazil and no doubt others) to help tide them through a rough patch and, China hopes, to secure future supplies. Bradsher:

“This spring China has also been stepping up its purchases of commodities, which are usually bought in dollars. Iron ore has been piling up on Chinese docks, government stockpiles of crude oil and grain are being expanded and stockpiles are being started for products like gasoline, diesel and sugar.”

The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.” (Brad Setser)

New Jersey CFO

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The basic story of China’s foreign portfolio is simple…..

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