Weekend reading links

1. A very comprehensive presentation by Nathaniel Bullard on the various issues involved in the decarbonation project. This is a stark reminder of the problem with modern economic growth - 1950s appear to have been the CO2 emissions take-off period.

But per capita CO2 emissions appear to have peaked

As a result, economic growth and emissions appear to have decoupled.

In the US, the entire net additions in primary energy is from renewables.

2. Saudi Arabia led OPEC announce further cuts in oil production to shore up prices. While this would be a blow to a world economy already grappling with inflation and an impending slowdown, it would be a boon to the Russians.

3. As China conducts a high intensity naval exercise in international waters near Taiwan and Japan in response to the Taiwanese President Tsai Ing-wen's visit to the US, Gideon Rachman has an oped in FT calling for western unity in containing China's aggressive intentions.

There are three main arguments for sticking up for Taiwan. The first is about the future of political freedom in the world. The second is about the global balance of power. The third is about the world economy. Together they amount to a compelling case to keep Taiwan out of Beijing’s clutches... the Indo-Pacific region as a whole has several thriving democracies including Japan, South Korea and Australia. They all depend to some extent on a security guarantee from the US. If China crushed Taiwan’s autonomy, either by invading or by strongarming the island into an unwilling political union, then US power in the region would suffer a huge blow. Faced with a prospect of a new hegemonic power in the Indo-Pacific, the region’s countries would respond. Most would choose to accommodate Beijing by changing their foreign and domestic policies... The implications of Chinese dominance of the Indo-Pacific would also be global, since the region accounts for around two-thirds of the world’s population and of gross domestic product. 

If China dominated the region, it would be well on the way to displacing the US as the world’s most powerful nation. The idea that Europe would not be affected by that shift in global power is absurd... Taiwan produces over 60 per cent of the world’s semiconductors and about 90 per cent of the most sophisticated ones. The gadgets that make modern life work, from phones to cars and industrial machinery, are run with Taiwanese chips. But the factories that produce them could be destroyed by an invasion. If Taiwan’s chip factories survived but fell under Chinese control, the economic implications would be huge. Control of the world’s most advanced semiconductors would give Beijing a chokehold over the world economy. As the US has already discovered, replicating Taiwan’s semiconductor industry is much harder than it sounds. All these considerations — economic, strategic, political — make a compelling case for the US and its allies to protect Taiwan. No one in their right mind wants a war between America and China. But now, as in the past, it is sometimes necessary to prepare for war — to keep the peace.

The operative part is that it's necessary to prepare for war to keep peace. 

This is sound advice for appeaceniks like Emmanuel Macron who has implied France will not protect the island since there is a "great risk" for Europe in getting "caught up in crises that are not ours." At a time when China has been conducting aggressive naval exercises and tensions between China and US are on the boil, it's difficult to see Macron's statement, and that too while on a visit to China, as anything other than appeasement. The damage it would have in adversely impacting the delicate deterrence on Taiwan is real. This is a good summary.

Sensing the damage, Germany's foreign minister Annalena Baerbock during a visit to Beijing and EU's foreign policy chief Josep Borrell have both warned China against using military force against Taiwan. Baerbock said that "a unilateral, to say nothing of a violent, change of the status quo would be acceptable to us Europeans."

4. Ruchir Sharma points to how dominant Big Tech has become in the US and how non-disruptive US capitalism has become

Today, all of the top five US companies are tech businesses and together they represent more than 20 per cent of the stock market — the highest concentration since the 1960s and more than double the figure a decade ago. The decline in competitive churn is a side-effect of the rescue culture that has been growing since the 1980s. Ever since the US Federal Reserve stepped in to prop up the market after the 1987 crash, the stock market has grown dramatically, from half the size of the US economy to two times larger at its peak in 2020. One might assume an expanding market should create room for more churn, but no, not in America. The number of US companies that remain in the top 10 from one decade to the next has risen steadily, from just three in 1990 to six at the end of the 2010s. And while churn has weakened in the US, it remains relatively robust across much of the world. From the start to the end of the 2010s, just two companies remained on the top 10 list in Japan, four in Europe, four in China and two in the global list, Microsoft and Alphabet. Today, the top five US companies are bigger than the next five by the largest margin since the early 1980s. The top two alone account for nearly half the market cap of the top 10, up from 35 per cent at the start of the pandemic. Apple is now number one, and is nearly six-times larger than UnitedHealth Group, in 10th place. Three decades ago, Exxon was number one but just over twice the size of the tenth company, BellSouth.

The biggest beneficiary of the bank bailouts in the US are the big technology companies. This is reflected in the rebound in their stocks after the bailouts were announced. The bailouts also reflect the regulatory capture by Big Tech, a point highlighted by the Texas mayor 

In Texas, the mayor of Fort Worth recently said that the “main thing” worrying business leaders is this question: if SVB had served the oil industry rather than tech, would the government “have stepped up the same way?”

5. The recent banking crisis that was triggered by SVB had its roots in classic asset-liability mismatches, excessive exposure to long-term government securities (50% of assets, compared to 29% in India), concentration of credit risk (startups), and liquidity risk (disproportionate share of bulk deposits). In its context, TT Rammohan draws attention of the RBI's "intrusive" regulatory approach which has prevented bank runs in India,

It is fair to suggest that the Indian banking system is better equipped to pre-empt the sort of risks we are talking about...The average holding of government securities in the Indian banking system today is 29 per cent of liabilities. The majority of holdings are held to maturity and hence insulated from market risk... The Reserve Bank of India (RBI) monitors concentration risk closely. It has in place stringent norms for risk exposure to a borrower. Exposure to “sensitive” sectors, namely, real estate, commodities and the capital market, is restricted. The RBI is quick to draw attention to excessive exposure to any industrial sector or product. As for liquidity risk, the RBI watches dependence on “bulk” deposits like a hawk. Where the dependence is high in absolute terms or out of line with that of peers, the RBI asks for the proportion to be brought down in a specified time-frame. 

The RBI’s monitoring of boards and management is more intense than elsewhere. Appointments to the posts of chairman and managing director at banks require the RBI’s approval. The RBI typically approves terms of three years but may approve a shorter tenure. There are age limits for the managing director and chairman. There are norms for the composition of bank boards and for the audit and risk management committees. Most regulators limit themselves to fixing the ratio of variable pay to fixed pay of the chief executive officer (CEO). The RBI does this and, in addition, regulates the fixed pay of the CEO. It understands only too well the link between executive pay and systemic risk in banking. Two reports that the RBI makes available to bank management are noteworthy: The Annual Financial Inspection report and the Risk Assessment Report. These highlight the entire gamut of risks, shortcomings in systems and processes, the functioning of the board, lapses in compliance, etc. Those who have sat on bank boards will vouch for the high quality of these reports.

The RBI need not be apologetic about its approach to regulation and supervision. The approach is intrusive, no doubt. It can be irritatingly prescriptive. It will be seen as micro-management. But it serves a purpose, namely, shoring up stability in banking.

6. Poonam Gupta points to the bias with credit rating agencies in their assessments of developed and developing countries

A UN paper attributes the bias to the location and origin of the staff of the credit rating agencies. The headquarters of credit rating agencies are located in the US. This itself contributes to the bias in favour of the US. Besides, they fear being legally sued by advanced economies for granting them ratings lower than what they think they deserve. A majority of the managers and analysts in the rating agencies have been trained at universities based in advanced economies, resulting in “group think” and “home bias”. Finally, given the oligopoly in the rating industry, the raters mimic one another, perpetuating the bias...

Our own analysis of the credit ratings of the G20 countries confirms this bias. We compute the average numerical ratings of the three largest credit rating agencies, viz., Moody’s, S&P Global, and Fitch, on a scale of 1 to 20. While the average rating of an advanced economy is almost a perfect 19, that of an emerging market is 7.5 points lower, at close to a junk grade of 11.6 (the junk grade is accorded to a rating of 11 and below). The differential is not explained by the levels of growth rate, debt or fiscal deficit of these countries. The emerging countries live under the perennial threat of a potential downgrade to below the junk grade. India’s average rating in 2022 was 12, just one notch above the speculative grade.

7. Interesting article on the changing trends in urban planning, from grids to radial plans to cut de sacs.

8. Finally on the importance of property prices to the developed economies,

In developed economies... real estate is formalised, and mortgages are 30 per cent to 60 per cent of banking credit... Not only is housing an important source of economic demand, accounting for 10 per cent to 24 per cent of gross domestic product (GDP), but it is also an important asset for most households. Most importantly, being a long-term asset, its value is highly sensitive to interest rates... In major markets, nearly a fifth of loans have loan-to-value ratios more than 80 per cent: A 20 per cent price drop would mean a distressed mortgage... We estimated a 0.9 percentage point impact on global growth if housing construction in the US, China, Germany, Canada, and Australia were to fall back to trend: Most of it due to slower construction, and the rest due to weaker consumption caused by negative wealth effects as house prices fall.

The Economist has an update on property markets in developed countries.