Beware the 2-edged Infra Knife !

Beware the 2-edged Infra Knife !

Ganga Prasad Rao

Energy, Environmental and Mineral Economist

gprao64.blogspot.com

gprasadrao.blogspot.com

gprasadrao@hotmail.com

Disclaimer: As always, the author absolves himself from the many reasons that might cause the proposed solution to fall short of intended outcomes. All errors, particularly language, grammar and diction, are indeed mine !

Not one election passes without reference to the ‘Development’ agenda espoused by political parties – no matter which leaning. Public Infrastructure is high on the agenda of political parties for obvious reasons: they are immediately GDP-and Employment positive; they stoke the Resources and Manufacturing sector, beyond opening aggrandizing opportunities in the Realty sector. Central Banks, and local banks are all too willing to sponsor, support and manage public infrastructure projects.... last, but not least, politicians, in the immediate precinct and beyond, reap political capital from such projects. With so many positives about it, why’d Public Infrastructure be a cause for concern?

Economists and Policy-makers, more truthfully, the conscientious, sagacious and far-sighted among them, realize that Public Infrastructure is just that – Infrastructure for the public that is funded publicly through politicians given a mandate by Voters at large. Politicians face strong political pressures and economic incentives to fast-forward grandiose public infrastructure projects that are immediately aggrandizing to businesses. Consequently, the Political Government – comprised of the Ruling party and the Opposition - finds it expedient to open the Public taps, and fast-forward approval of these projects with little regard for the environmental and social consequences of unbridled Real-reducing Nominal expansion¹. If it were not for the fears of inflation that large Public Infrastructure projects stoke, or the delays and compensations associated with acquiring private land around project sites, Public Infrastructure would have gobbled a much larger share of the Nominal Liquidity pumped in by the Central Banks.

Public Infrastructure is a decidedly 2-edged animal when it comes to its environmental efficiency. Many public projects, in particular, mass transportation projects, are proposed expressly to contain the growth of private transportation and the consequent enlargement of environmentally-injurious fossil fuel consumption – whether from resources at home, or worse, imported. However, and in practice, these projects, whether implicitly, or explicitly, are tied to an FV-expansion of Private Lifestyle, such that when finally realized after years, even decades, the Public Infrastructure has arguably achieved its surreptitious goal of expanding the Private agenda – whether in Private Transportation, or land deals around compensations and appreciation. Worse, and whereas the raw materials procured for construction toward the public infrastructure project engender a substantial release of emissions, the promised reductions in emissions in post-construction years, turn evanescent in reality for reasons an expanding per-capital economy, thus bringing in to question a fundamental justification for such projects. Surely, Public Infrastructure is not a ‘Beggar the Public to Aggrandize the Private and Reduce the Commons’ joke for the Voters to suffer as the price for voting in a Political Government, and await the Nominal Private Aggrandization juggernaut to roll over them?

The natural question to ask, then, is whether policy-makers have a tool to sift the ‘environmentally good’ infra projects from those ‘bad’? And a mechanism to incentivize the former, and dissuade, even offer an alternative to the latter? Ask Academics, and they’d, perhaps, suggest internalizing project-associated externalities through Carbon taxes. One of strongest positive attributes of Public Infrastructure – that it is a GDP-multiplicative activity locally and regionally – is also a significant problem. Pecuniary emissions associated with incremental regional activity are not taken cognizance of in the accounting of project externalities. More insiduously, when Public coffers are open to Voter-endorsed Politicians to fund Public Infrastructure with, when accounting of Public Infrastructure projects span multiple Governments and turn it a veritable blind-man’s elephant, carbon taxes, even if paid on the immediate infrastructural activity, do little justice to the scale of externalities engendered by the project in its wake and aftermath. In such context, carbon taxes per se, could be environmentally limiting and ineffective; they offer, if purchased in bulk at discounted prices in recessions, a loophole large enough to pass a white elephant through; a white elephant that is swept under the carpet as Voters prepare to vote in a fresh cycle of public infrastructure projects with the next ballot. But all this begs the question, do we have a credible alternative?

There is......more correctly, there would be. Consider, an Environmental Cause Bond serving the role of a Super Regulator to the Political Government. On its Cause side, it has members who lien their Bond holdings toward the long-run goal of the Bond: Carbon Sustainability. Businesses that intend to conduct their activities within conformance of the long-run goals of the Cause Bond, are permitted or ‘licensed’ by the Cause Bond to operate as OC-Participants. Those businesses that reject environmental sustainability, or the concept of a Super Regulator issuing licences, and permits, would be categorized OB-Recalcitrants – whether physically a part of the Bond, or as represented by Deemed Proxies. The Cause Bond operates with a Gold PV-FV Collateral that covers the Bond from default for many reasons, including continued failure to achieve the intended path to final ETV. To cover Cause Long-liened members, whose goal it is to ensure the eventual success of the Bond, the Collateral-Administrator issues Long Gold Futures that cover significant decrements in Cause Bond ETV, extending to Bond Default. These Collateral Long Gold Futures would be available for trading between Cause members, OC-Participants, and members of the Bullion². The Collateral Administrator permits trade in Collateral Gold Long Futures³ between Cause-focussed, Long-Cause members, OC-Participants-Volatility players, and short, Nominally-attuned Bullion Traders⁴. As would be expected, nominal activities, here sub-aural Public Infrastructure projects, that hasten emissions from the indeterminate future to the present and increment them in the short, intermediate, and long-run, would induce NAV and ETV of the Environmental Cause Bond to decrement. In turn, disadvantaged Long-liened Cause members would seek to their hedge their losses in Collateral Long Gold futures, which would increment to reflect enlarging environmental/nominal externalities associated with those specific sub-aural Public infrastructure projects. Such ‘irrational’ increments in Gold Long Futures (Shadow) prices would be shorted by OC-Participants, and traders at the Bullion, albeit for the price of triggering a ‘Collateral ZS De-monetize’, a key that expresses as M2dot PV contractions that must be paid as Penalty Lumpsums⁵ by the environmentally-subaural Project⁶, or, and equivalently, as ‘Collateral-ZS-Monetized’ in to ‘Aural Green K2dot-Nominal AO ZS’ liquidity and distributed in the regional socio-economic circle relevant to the project⁷. Conversely, a truly environment-friendly Public infrastructure project, that, albeit incrementing emissions in short-run, attenuates it in the longer run, would induce Cause Bond NAV and ETV to increment, and Long Gold Futures prices to abate. The Bond would process, or sponsor such compatible projects for conventional M2dot monetization, and possibly, issue a Lumpsum to kickstart them.

Between lumpsum strictures, and rewards issued Public Infrastructure Projects, and accompanying Bond-sponsored K2dot-M2dot expansions and contractions executed by the Central Banker, the Environmental Cause Bond obtains a critical separation of environmentally-friendly, and unfriendly public infrastructure projects. Such identification and differential treatment incentivizes the environmentally-friendly, and delays, denies, or metamorphoses the less-friendly among public infrastructure projects. The proposed mechanism offers the Political Government an invaluable tool to critically sift between genuine public-benefiting projects worthy of opening the public coffers for, and those that are publicly-injurious in the long, but nominally aggrandizing to various constituences and capital market investors in the immediate.

Care for the pdf? Try this link: Beware the 2-edged Infra Knife !

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ps:

Would we, as the Public aware of this critical issue, and a possible answer to it, yet be as lazy and careless as to continue with ‘Nominally-frothy’ laissez faire? Want to line-up for the Ballot box, and monetize a Burj-beating Tower to skydive from?

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1Stretching the logic a bit, public infrastructure projects stimulate employment, family formation, and thus induce population migration and expansion in to the neighborhoods served or impacted by it.

2OB-Recalcitrants would be excluded from trading in Collateral Gold Long Futures for reasons obvious conflict of interest.

3Issued for the same period as Cause Bonds

4Whereas PV Gold prices must equalize ‘publicly’ across the Bullion and (Bond) Collaterals, ‘private’ FV Gold Futures prices would pertain to specific objectives hedged by specific Cause Bonds (or, their Collateral Administrators); that is, Cause Bond Collateral Administrators would issue unique ‘private’ Gold Long Futures specific to their Cause, OC, and the Bullion. Thus, and when participants buy or sell ‘private’ Long Gold Futures, they would, in effect, be operating in the limited context of a specific ‘private’ Futures price responding to changes in Cause Bond ETV brought about by activity that is in the immediate cognizance of the Bond. An increment in the price of these Long Gold futures would imply an expansion of the Nominal due activities sub-par and inimical to the Cause. Long-liened Cause members would prefer those inimical activities are excluded from the future, while Bullion traders, predictably, would be less averse to them.

5These Lumpsums would be nixed by the Bond in arrangements with the Central Banker. For example, the Lumpsum would be netted out and nixed in the next Liquidity issue of full face value (ie, a ‘penalty’ of $10 Million would be netted out of a fresh liquidity issue of face value a Billion dollars, but for which only $990 Million would actually be issued.

6in magnitudes proportional degree of deviation from the Aural environmental threshold adopted by the Cause Bond.

7This latter strategy is effectively a balancing distribution of ‘Nominal AO ZS’ monies in the neighborhood impacted by the project – whether pecuniary or non-pecuniary.   

A Solid-Waste Solution to Climate Change? A Macro-Financial Strategy around Sovereign Gold and ESH Bonds

A Solid-Waste Solution to Climate Change? A Macro-Financial Strategy around Sovereign Gold and ESH Bonds

GangaPrasad Rao

Energy, Environmental and Mineral Economist

gpra64@gmail.com

gprasadrao@hotmail.com

Disclaimer: This manuscript explores an industrial policy from a wider, Social-Finance perspective, for which reason, it is necessary to examine the matter without the horseblinds imposed by PV-Finance. The author makes no claim about reliability of the proposed design, or the assuredness of indicated outcomes.

Introduction

Plastics have turned an ubiquitous raw-material, intermediate- and consumer ‘product’ in our society. Its quality, diversity, and niches have expanded the breadth of applications, but engendered a large and exacerbating solid waste externality. Concomitantly, iron and steel-making, a primary resource and infrastructure sector across the world, continues to be a pollution-intensive industry despite significant gains in recycling of iron scrap. The significance of the environmental footprint from these sectors cannot be over-stated as societies around the world pursue an infrastructure-intensive, LQ-maximizing, nominal economic paradigm.

In recent decades, many technologies have sprung up that have, on one hand, increased the feed-flexibility of blast-furnace based iron making, and on the other, enhanced the recycle, and re-use of processed and composited plastic waste a technical feasibility. Together, these technical developments present a hitherto unrecognized opportunity for policy makers to devise financial and economic strategies that ‘hatch’ these technical developments in to the market by defensibly manipulating lumpsums, lines, rents and prices through an appropriate macro-mechanism. This paper broaches one such design centered around a resource-prudential, macro-societal and micro-pricing strategy. The strategy exploits a 3-way, induced strategic pareto between iron-makers, plastic recyclers, (tyre recyclers) and coal interests to put together a Sovereign Gold and Bond-centered strategy that leverages market forces to re-align incentives and secure multiple goals concomitantly and efficiently.

The Challenge

Many recent innovations and technologies – from nano-science and IT, to robotization, are indiscriminate in bestowing their benefits between the Closed-cycle and the Open Cycle. The Open Cycle economy, characterized by production inefficiency, use of fossil fuels, and hence environmental externalities, is, paradoxically, benefited more than is the Closed-cycle by such technologies that enhance its efficiency, reduce costs, turn it more competitive, and hence extend the longevity of constituent firms and industries¹, albeit at the cost of exacerbating externalities. Thus, Steel-making, or rather its intermediate product, iron-making with Pulverized Coal/Coke as fuel/reductant – one of the more environmentally-injurious processes, has turned more production-efficient for the myriad technological innovations and reliability-enhancements, and consequently, has leveraged its status as a crucial infrastructure sector within and across nations. Similarly, Coal mining has expanded scale and lowered costs with new technologies, and successfully countered, both, its environmental and economic disadvantage relative other fuels. Reductions in costs of iron-making and coke manufacture due the new wave of innovative technologies, would, logically, enhance profitability, and extend, if not enlarge externalities associated with these processes.

The above context presents a challenge, even an opportunity. The opportunity lies in devising a strategy that leverages societal values for Closed-Cycle and Climate Sustainability by ‘closing’ the iron-making production cycle, that simultaneously resolves the exploding solid-waste externality due plastics, and which also compensates Coal interests for the de-classification of their proved, economic reserves. The challenge involves the design of a macro-strategy that turns iron-making 3-way sustainable - a) by enhancing the economics of recycling plastics and its composting in to coal- and coke substitutes, b) by offering financial incentives to iron-makers to adopt these substitutes, even if it means varying operational and quality parameters, or adding to costs, and c) ensuring further, that Coking Coal interests are compensated for the consequent loss of economic reserves. Such design, if successful, would incentivize sustainable recycling of Plastic solid-waste globally, and abate externalities associated with mining of metallurgical coal, and its processing in to Coke. But how’d one placate Coal for the loss of production and its not inconsiderable reserves, incentivize recyclers to recycle plastics in to composites, and persuade iron-makers to substitute coal fines and coke with plastic composites, while taking on the risk of cost increments and product quality variations? This manuscript outlines a strategy that anticipates the financial and economic stumbling blocks that might confront policy-makers, and offers a defensible, ESH-prudent, sovereign, macro-financial strategy that obtains desired outcomes efficiently through market-based instruments.

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Interested in more than just the Intro and the Conclusions? Here's the pdf: GP Social Macro Finance

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To Conclude.....

The Nominal Paradigm, coupled to a per-capita economy administered by a populist government comprised of Political parties in nexus with stock market capitalists and purveyors of open-cycle technologies, causes environmental and social externalities to explode and threaten societal sustainability¹. Post producer- and post-consumer Plastics waste is a very obvious and enlarging externality of modern times. Concomitantly, Coal mining and Coke production, is beset with its own externalities in production, processing, and in use. This manuscript perceives an emerging pareto opportunity around, on one hand, developments in Plastics Recycling and Compositing, and on the other, in the use of re-processed Plastics waste as Reductants in Blast Furnace Iron-making. Though demonstrated technically, these innovations remain largely in the realm of niche, government-supported programs. This proposal offers a financially-defensible, economically-robust, market-based design to incentivize CC-technologies at multiple points in the economy, and thus brings about a quantum jump in the recycling and re-use of plastics beyond furthering Closed-Cycle goals.

References

1. Plastics convert iron-ore to Steel: Feedstock recycling in blast furnaces, Plastics Europe.

2. Recycled Mixed Plastics as Reductant in Iron-making, Dankwah, Amoah, Dankwah and Fosu.

3. Recycling of Waste Plastic Packaging in Blast Furnace System, Yojiogaki, Koichi Tomioka, Watanabe, Koji Arita, Kuriyama and Tetsuro Sugayosh, NKK Technical Review No. 84 (2001).

4. McKenna, Phil. ‘New Life for Old Tires’. MIT Technology Review.

Electoral Bonds with a 2wist !

Electoral Bonds with a 2wist !

GangaPrasad Rao

Energy, Environmental and Mineral Economist
gprao64@gmail.com

Every Budget has its surprise, its climaxes and disappointments. This Jaitley Budget is no different. The Press says it is a good, fiscally-prudent budget, and so it must be, for the Press doesn’t ever lie. But this column is no diatribe over the Press’s freedom and its inclinations. Rather, its about an opportunity to leverage and further enhance a certain proposal in the Budget – the proposal to fund electoral campaigns by issuing Electoral Bonds. My read on the issue is that the RBI would issue Electoral (Bearer) Bonds through designated Banks to various entities – Individuals, Businesses, Foreign Institutions, who may then donate these Bonds anonymously to (a) Political Party/Parties of their choice. Parties may redeem these Bonds immediately through their registered Bank accounts. The proposal is, ostensibly or otherwise, meant to cleanse Electoral financing of black money, and bring about ‘transparent democracy’.

Now, the democracy that Indians vote for, is constituted of a ‘Political Government’ - a Government comprised of major political parties that runs the nation in a conclave with Bankers, Technology-providers, Domestic Capitalists and Foreign Institutions. The Government obtains the collective preferences of the Voter Group, manages the monetary and the fisc to engender an expansionary Real-Nominal economy. This Real Society-Nominal economy offers returns to Capitalists and Investors, while ensuring livelihood, security and lifestyle-quality to families, even as it expands its power base. Voters, Businesses and Foreign Entities could be deemed to seek a Compact with the Political within this socio-politico-economic context – a Compact that more clearly defines the exchanges between themselves and the Political Government. Whereas Voters seek Livelihood security and a safe, nurturing society (and by implication, reasonable returns to Parenting, Gold and Realty – their Wealth Repositories), domestic Businesses support the political in expectations of a Keynesian Nominal Cycle that is pareto with the Political Government and the Nominal Society. Foreign entities could be grouped together so they maximize a polar ‘ Millenial Development Goals-CC Principles-Nominal Profits’ objective. Given this context, Politicians juggle their options – Sovereign relations, Money supply, temporally and regionally-defined technological Opportunities, and FX compromises, to pursue a Real-Nominal economy that addresses the concerns and wishes of all sections of the society.

The proposed Electoral Bonds could be strategized within this contextual Compact. How’d one structure a strategy around the issue of Electoral Bonds that addressed the multi-party Compact? If Electoral Bonds, essentially non-enforceable Debt instruments issued by Political parties, are issued by the RBI, the same could be ‘supply-optimized’ by Political Parties at times, and in numbers consistent with their political situation, and prospective plans. Thus, and should elections be impending, prospective technological and economic opportunities abundant, businesses friendly, and public interest in the Political Government healthy, Political Parties might signal RBI issue Electoral Bonds incrementally. Conversely, they might suggest RBI delay issuing Bonds, or otherwise issue a limited number of Bonds if their ‘private’ finances are in good shape, Business confidence in the Political Government waning, technological and economic opportunities evanescent, or if GO ascendant in the masses. Upon indications from the Political Circle, the RBI, offers at its Political Bond Annexe, a variable number of Bonds at the ‘ordered auctions’. These auctions offer all Bonds available for the day/week to Voters first, domestic Businesses and Capitalists next, with the residual on offer to FIIs. Voters, offered a means to donate politically, seek to assure their livelihood security through donations of Electoral Bonds. Despite the absence of a formal compact with the favored party, they’d, rationally expect, at all times within the Political cycle, either, continued employment, alternative employment opportunities, or, salary-insurance for a length of time proportional the magnitude of their donations. Hopeful of livelihood security, Citizens, particularly those in the middle class, who must invest early in education and indenture themselves for a home loan, donate Electoral Bonds in return for informal livelihood/salary insurance within the (next) Political Cycle. Those who seek such insurance at higher salaries might have to contend with exponentially-increasing investment in Electoral Bonds. Between the imperative to assure the family a future, and an exponentially increasing ‘premium’ price to pay, the middle-class households find an optimum amount of Political Bonds to buy and donate. Post buying such assurance, middle-class householders, would exhibit an increasing propensity to consume as a group, ie, they’d be willing to save less and spend more. Infused with ‘Consumerist animal spirits’, households would spend more of their disposable income, stoke a consumer-centered economy, and assure the society a Keynesian plenty.

Domestic Businesses Houses, which plan to secure and expand their businesses across political cycles within a ‘Social Real-Keynesian Nominal’ framework, donate strategically and anonymously to the Political Circle. Their donations are in the form of AO Expectations around Subsidies, FX and Interest Rates in the short-run, and Competition and Capital Investments in the long. Parties receiving such donations would then be sympathetic to business concerns and accommodate them between the niche-oriented Political Compact and uncertainty-hedged Capital markets. Simultaneously, Businesses, fearing parties with full coffers which might yet yield to populist pressures, would limit their donations to ensure Political parties do not splurge in political returns and turn against them in a subsequent cycle. Between buying a Keynesian stimulus, and protecting their profits and rents, Domestic businesses find an optimum amount of Electoral Bonds to buy and commit to the Political.

A similar argument applies to the polar objectives of FIIs. Whereas they seek political sympathy with their client’s MDG agenda, and Global CC Conformance beyond returns to political foresight, entrepreneurship and alacrity-based arbitrage, they fear donations made with these objectives might tilt the scales in regional political spheres, and hence limit their participation to an equilibrium that balances the incentives and fears. The aggregation of (sequential) demands for Electoral bonds from Individuals, Businesses and FIIs, when faced with a supply of Bonds from the Political Circle, obtains an equilibrium in the Electoral Bond Annexe market, thus establishing a marginal price for the Bonds.

Now consider a public market for Bonds that trades beyond Electoral Bonds, Sovereign Bonds of various tenures, as well select Sovereign Bonds of neighbouring nations and major Trade partners. Electoral Bonds redeemed by Political parties end up in this market, and are traded alongside as yet ‘undonated’ Electoral Bonds against Sovereign Bonds of various affiliations. (One wouldn’t, normally, expect Political parties to buy Electoral Bonds in this market; however, they might do so on rare occasions for diplomatic and strategic political reasons). These trades reveal the political mood of the nation, the trade-offs between, on one hand, domestic politics and political expectations, and on the other, sovereign and trade relations with neighbouring countries. Trading reveals political, electoral, sovereign as well as trade opportunities, and threats that could be gainfully interpreted by psephologists, diplomats and policy makers. For example, trades in the Political Annexe of the Bond market might reveal how Businesses favoring a Right-wing party might quantitatively impact, post-elections, relations with neigbouring sovereigns, and relations with major trade partners. (Donations may be timed to coincide with, or any time after, upon ensuring social and political compatibility. Bond-holders may hold on to the Bonds and time their donations to political receptiveness. Political parties, funded by 3 significant economic constituencies, choose to accept donations such that they are, on one hand compatible with the Political Compact, and on the other, consistent with the donor aspirations).

This proposal has much to commend. First and by far, the most significant, the strategy of leveraging Electoral Bonds to serve as Livelihood Insurance is likely to induce a marked reduction in marginal propensity to save among the middle class, and thus engender an incrementally Consumerist society within a pareto political context. It is also conformable with Business incentives and fears, and offers a credible means to signal intentions to the Political. Third, the strategy provides foreign entities – whether multi-lateral institutions, or Capitalists, a public means to interact politically with a future Government whose agenda they’d like to influence to advantage. The facility to intervene in the Political Annexe of the Bond market permits the RBI - a proxy for the Sovereign Fiduciary, a hold upon Electoral/Campaign liquidity, and signal unacceptable threats to the Sovereign, or to the Trade economy.

The first step toward cleaner electoral politics has been taken by Jaitley. The proposal above could modestly, be deemed a second. The ball now lies in the public court to ensure these bonds serve the larger purpose of a sustainable society and a democratic politic..