Wednesday, January 22, 2020
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A ‘Green Swan’ is the next economic nightmare
The splashiest talking point at this year's World Economic Forum in Davos is the idea of a “Green Swan.”
The Bank for International Settlements (BIS) — known as the central bank for central banks — said in a paper titled “The Green Swan” that climate-related events could be the source of the next financial crisis. And that these risks pose a particular challenge to economists trying to model economic outcomes.
“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us,” said François Villeroy de Galhau, the governor of the Bank of France, in the BIS’ report.
“The increase in the frequency and intensity of extreme weather events could trigger non-linear and irreversible financial losses. In turn, the immediate and system-wide transition required to fight climate change could have far-reaching effects potentially affecting every single agent in the economy and every single asset price.”
In last week's run-up to Davos, at least two Wall Street banks chimed in on how climate change alters the conversation around what economic growth can be and how policymakers should pursue this end.
“Debt, inequality and environmental damage are major issues for growth sustainability," said economists at Deutsche Bank in a note last week. "However, one could argue that the first two are cyclical whereas the third is potentially structural."
In Deutsche Bank's outline of economic history over the last few centuries, growth has been the tide that lifts all boats, a “game changer for health and living standards.”
But if climate change makes a sustainable path forward for growth untenable, then our modern societal organization around this economic policy could be upended.
“We think we will soon enter a stage where there will be a realization of the immense economic and personal trade-offs we will collectively have to make in order to hit domestic and globally agreed climate targets,” the firm writes. “Such sacrifices may shock citizens and be difficult to administer in democracies.”
Deutsche Bank adds that, “The problem for the environmental lobby is that a world without economic growth may create a damaging backlash against such climate policies. Nevertheless, the problem with the status quo is that the irreversible damage to our planet will increase.”
On the one hand, modern civilization is screwed. On the other hand, modern civilization is screwed.
Economists at JPMorgan also examined the impact climate change is having and could have on economic growth. And by the firm’s estimates, the current work outlining potential impacts on economic growth due to climate change are still too conservative.
“Economists have struggled to quantify the impact of other aspects of climate change beyond temperature and precipitation, such as extreme weather events, droughts, heatwaves, floods and sea level increases,” the firm writes.
“These broader aspects of climate change would not only impact GDP and welfare directly, but would also have indirect effects via morbidity, mortality, famine, water stress, conflict and migration. There will also be damage to buildings and infrastructure and possibly the premature scrapping of some of the capital stock as policy and technology change. Moreover, there are plenty of non-linearities in both the climate system and the macro economy which could make the economic consequences of [business-as-usual] much more severe.”
Still, JPMorgan sees business-as-usual dominating the decision-making among political leaders in the years ahead.
“Developed economies, who are responsible for most of the cumulative emissions, worry about competitiveness and jobs. Meanwhile, Emerging and Developing economies, who are responsible for much less of the cumulative emissions, still see carbon intensive activity as a way of raising living standards,” the firm adds.
“It remains to be seen what the consequences of this will be, but one thing is sure: [business-as-usual] opens the earth to a greater likelihood of a catastrophic outcome from the fat upper tail of the probability distribution,” the firm writes. “It also increases the likelihood that the costs of dealing with climate change will go up as action is delayed. And finally, it increases the likelihood that the changes in the climate will be irreversible.”
“It is a global problem but no global solution is in sight.”
What to watch today
8:30 a.m. ET: Chicago Fed National Activity Index, December (0.15 expected, 0.56 in November)
9 a.m. ET: FHFA House Price Index month-on-month, December (0.3% expected, 0.2% in November)
10 a.m. ET: Existing Home Sales month-on-month, December (1.5% expected, -1.7% in November)
6:45 a.m. ET:Johnson & Johnson (JNJ) is expected to report adjusted earnings of $1.87 per share on $20.87 billion in revenue
4 p.m. ET: Texas Instruments (TXN) is expected to report adjusted earnings of $1.03 per share on $3.22 billion in revenue
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