Month: February 2022

The last week has been one in which the various negative impacts of fossil fuels has been emphasised. Two reports have been issued noting the critical vulnerability of our earth to climate change arising from the use of carbon-based fuels. The Intergovernmental Panel on Climate Change issued its Sixth Assessment Report which highlights a series of challenges we will be facing. It is a long and detailed report that does not make for easy reading both in terms of content and message.

Almost simultaneously the UN Environmental Program issued “Spreading like Wildfire: The Rising Threat of Extraordinary Landscape Fires.” As noted with the release of the report: “Recent years have seen record-breaking wildfire seasons across the world from Australia to the Arctic to North and South America.” They go on to note that “(u)ncontrollable and extreme wildfires can be devastating to people, biodiversity and ecosystems.”

But we also see the impact of our reliance on fossil fuels in the Putin invasion of the Ukraine – also leading to flames as reported by the BBC among others. It appears that an element behind Putin’s attempt to extinguish the sovereignty and freedom of the Ukraine people was a belief that the dependence of Europe, and especially Germany, on Russian gas would deter any meaningful response to this violation of civilized norms as well as the 1994 agreement between the Russian Federation, Ukraine, Britain, and the US to “respect the independence and sovereignty and the existing borders of Ukraine.”

Whilst the invasion of Ukraine is an egregious example of how the use of fossil fuels creates geopolitical challenges, it is not the only time that these challenges have been seen. With solid reporting again by the BBC we learn of the murder and dismemberment of Jamal Khashoggi for his critical reporting on Saudi Arabia. Again there was very little effective response from a world that was and is dependent on the flow of fossil fuels from Saudi Arabia.

The poison of a dependency on carbon-based fuels leads not only to global warming that threatens our future but also to geopolitical actions that threaten a civilized society today.

The black swan is often used as a metaphor for the arrival of unexpected risks. And a group of swans is generally referred to as a wedge – reflecting their flying pattern. In looking at the world today, it seems to be that we are potentially facing a wedge of black swans creating significant social, political, and economic risks. Perhaps the realisation by many that the world is currently risky drives the current negative feelings that seem to be unjustified by relatively benign or even positive economic measures.

Inflation is one of the issues for which there does not appear to be a clear perspective of what will happen and what policies should be taken to address it. A recent article by Paul Krugman provides interesting insight using data. Krugman has been sceptical of the longevity of the current increase in inflation, but he digs deeper into potential driving factors and is consequently more concerned. He specifically focuses on the possibility that US economic potential has permanently decreased due to a decrease in the number of people who are part of the workforce.

An analysis by the Peterson Institute for International Economics digs deeper into the workforce issue noting that the Congressional Budget Office sees excess mortality and reduced immigration as being driving factors for reduced labour. Excess mortality is clearly a result of COVID-19. But immigration has been impacted by the policies of the former Trump administration to reduce immigration to the US. The impact of those policies is now being felt by the labour market at all levels of compensation.

Unexpected issues related to COVID-19 are also significant. As reported in Nature, The Economist magazine has developed a model to measure excess deaths since COVID-19 began. That model estimates excess deaths of between 12.5 million and 22.5 million people, significantly higher than the 5 million reported COVID-19 deaths. In any case the impact on the economy is meaningful as these excess deaths represent people who are neither working nor consuming – thereby reducing economic potential.

Moving beyond inflation and COVID-19 there has also been an increase in geopolitical risk. The current dispute between Russia and the Ukraine is one such risk. Whilst it is easy to focus on the overall risk of conflict, it may be the case that the conflict represents more serious issues within Russia. There is evidence that excess deaths in Russia are particularly high (see Nature article referenced above). Furthermore, the impact of the melting of the tundra as reported in The New Yorker will create economic stress. These stresses can be creating internal strains that may not be fully apparent. What better way to address internal stress than to focus people on external threats – real or imagined.

China is also a potential black box of risks. These range from the long-term sustainability of a zero-COVID policy to internal economic stresses arising from real estate speculative investments as summarised in a Financial Times commentary. Increased internationalisation of funding for China real estate introduces new risks for the ability of the Chinese government to manage the situation as shown by the actions of foreign investors with secured lending positions. Again, these internal stresses may lead to actions to focus a nation on external issues such as the need to reunite with Taiwan. The Olympics create yet another potential point of stress with increased likelihood of COVID-19 entering the country to potential political statements by Olympic athletes from countries not as well controlled as China.

And of the known black swans we continue to see erratic weather patterns. The impact of climate change seems to be increasingly manifested in weather patterns that create social and economic stress in a variety of locations.

In summary unease seems fully warranted as a wedge of known and unknown black swans approach.