Rate (C/G)ut the Earth!

Rate (C/G)ut the Earth!

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar


I am no macro-economist, at least not with the credentials of Greenspan, Bernanke or Dr. Reddy. But I do know that lower inter-bank interest rate set by the Fed cascades down as lower interest rates on home loans and credit card loans on one hand, and to easier credit for businesses on the other. A surprise decision to lower interest rate ultimately means more real disposable income in the hands of the working class and induces higher consumption which in turn spurs production and investment, not to mention a spurt in stock markets globally. Not surprisingly, the boost in consumer confidence and higher economic activity augurs well for the incumbent party that seeks to 'soft-launch' the economy in its campaign to retain power. So what could be wrong with this tried and tested strategy? Nothing, if one did not care beyond the boundaries of one's nation and this generation. But in today's global economy, a move toward a lower interest rate regime by a leader of the industrialized nations, serves as a signal and sets a precedent that is followed by other industrialized and developing nations. The start of a lower interest rate cycle in the US sparks off rate cuts across the globe and turns, what is a purely domestic, even a political, ploy in to a global meltdown of interest rates. And with that restarts the unchecked growth in the chugging economies of South-East Asia.

Now that would not be such a ghastly proposition if the increase in economic activity were environmentally benign. But isn't that the sore spot? Living as we do in 2007, with a century of unchecked carbon emissions behind us and a veritable deluge of emissions on the horizon, even the most trivial increase in global economic activity, sets off alarm bells among global warming experts and environmental policy planners searching desperately for low-cost emissions reductions. In a world where 'luxury and lifestyle' is the mantra of the day, reductions in the cost of borrowing fuel a consumer boom that exacerbates everything from plastic and water pollution to global warming. Makes you wonder if that rate cut was at all warranted. After all, and if you ask me, the sub-prime crisis was carefully orchestrated to provide cover for underground 'just' and 'nefarious' purposes like the Iraq war, energy security and the Cheney Campaign Fund. And I do not buy in to the 'risk of recession' argument that has been bandied about as another reason for the rate cut (Besides, what is the logic behind handing out interest rate cuts to an indebted nation so it may consume and splurge more to 'support' the global economy?). If the FRB governors were at all cognizant of their actions on global economic activity and its environmental repercussions, they would have chosen to raise interest rates, not lower them. It is unbecoming of fed governors, whose decisions alter the course of the global economy and environment, to play in to the political game that has been designed to ensure the election of a Republican President. It will be another 5 to 10 years before we realize the full impact of the rate cut decision on the global environment, by which time it would have already been too late for anything but the most costly and drastic measures, which, predictably, we would be even less likely to undertake. Perhaps the rate cut would then have achieved its purpose? Scorched earth policy. Pray, what is it?

Did you know HSBC has come out with a 'Climate Change Index' to facilitate indexing arbitraging and benchmarking stocks that would be benefited from climate change? Now you may hedge your Carbon Emission Reduction credits, or for that matter, 3-month pork belly futures against 20-year options on climate change stocks. Short-term capital gains attract a 10% tax.